WGU D105 OA #2 Question and answers
rated A+ 2025
What is a major reason why a company may become involved in leasing to
other companies? - correct answer ✔Tax incentives
Which of the following best describes current practice in accounting for
leases? - correct answer ✔All long-term leases are capitalized
What single lease expense is recognized on the income statement? - correct
answer ✔An operating lease
In computing present value of the lease payments, what rate should the
lessee use? - correct answer ✔Use the implicit rate of the lessor, assuming
that the implicit rate is known to the lessee
Which of the following is an advantage of captive leasing companies over the
other players in the leasing market? - correct answer ✔The have the point-
of-sales advantage in finding leasing customers
What is included in the present value for the lease receivable amount? -
correct answer ✔Rental payments plus the present value of guaranteed and
unguaranteed residual values
Which of the following is a correct statement of on e of the classification tests?
- correct answer ✔The lease term is equal to or more than 75% of the
estimated economic life of the leased property
,A lessee had a ten-year finance lease requiring equal annual payments. What
should the reduction of the lease lability in year 2 be equal to? - correct
answer ✔The current liability shown for the lease at the end of year 1
What is the amount to be recorded as the cost of an asset under a finance
lease is equal to? - correct answer ✔Present value of the lease payments
In computing amortization of a leased asset where there is no bargain
purchase option, what should the lessee subtract? - correct answer ✔No
residual value and depreciate over the term of the lease
In order to be an operating lease, the lease must fail all five of the
classification tests. Which of the following describes the lease term test? -
correct answer ✔If the lease term is 75% or more of the economic life, it is a
finance lease
In an operating lease, what does the lessee record? - correct answer
✔Lease expense
Hull Co bought equipment and immediately leased it to Riggs company on
May 1, 2021. At that time, the collectibility of the lease payments was not
probable. The lease expires on May 1, 2022. Riggs could have bough the
equipment from Hull for $5,600,000 instead of leasing it. Hull's accounting
records showed a book value for the equipment on May 1, 2021, of
$4,900,000. Hull's depreciation on the equipment in 2021 was $630,000.
During 2021, Riggs paid $1,260,000 in rentals to Hull for the 8 month period.
Hull incurred maintenance and other related costs under the terms of lease of
$112,000 in 2021. After the lease with Riggs expires, Hull will lease the
equipment to another company for two years. What is Hull's income before
taxes related to this lease for the year ended December 31, 2021? - correct
answer ✔$518,000
Correct. This is an operating lease because the lease does not pass any of
the classification tests. (1) The ownership of the asset remains with Hull, (2)
,there is no purchase option, (3) the lease term is less than 75% of the
economic life of the asset, (4) the total payments (and therefore the present
value of the payments) of $1,260,000 is less than the fair value of the asset of
$5,600,000, and (5) the asset is not specialized and is expected to have an
alternate use after the end of Riggs' lease term. Therefore, the Hulls' revenue
related to the lease with Riggs is the number of lease payments less any
expenses related to the leased asset. $1,260,000 - $112,000 - $630,000 =
$518,000.
Which of the following would be included in the Lease Receivable account? I.
Guaranteed residual value. II. Unguaranteed residual value. III. Executory
costs IV. Rental payments. - correct answer ✔I, II, and IV
A lessor with a sales-type lease involving an unguaranteed residual value at
the end of the lease term will report sales revenue in the period of inception of
the lease at which of the following amounts? - correct answer ✔The sales
price less the present value of the residual value.
How should the Lease Liability account should be disclosed as? - correct
answer ✔Current portions in current liabilities and the remainder in
noncurrent liabilities
Metcalf Company leases a machine from Vollmer Corp. under an agreement
that meets the criteria to be a finance lease for Metcalf. The six-year lease
requires payment of $170,000 at the beginning of each year, including
$25,000 per year for maintenance, insurance, and taxes. The incremental
borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is
known by the lessee. The present value of an annuity due of $170,000 for six
years at 8% is $848,761. The present value of an annuity due of $170,000 for
six years at 10% is $814,435. The present value of an annuity due of
$145,000 for six years at 8% is $723,943. The present value of an annuity due
of $145,000 for six years at 10% is $694,664. At which value should Metcalf
record the leased asset? - correct answer ✔$848,761
, Correct. The lessor sets the terms of the lease and, therefore, the lessor's rate
of 8% is used. Metcalf's lease payable will include amounts associated with
maintenance, insurance, and taxes. Those amounts would be expenses in the
period the payment is made. Therefore, Metcalf should report the leased
asset on its balance sheet at $848,761.
Haystack, Inc. manufactures machinery used in the mining industry. On
January 2, 2021, it leased equipment with a cost of $480,000 to Silver Point
Co. The 5-year lease calls for a 10% down payment and equal annual
payments of $175,820 at the end of each year. The equipment has an
expected useful life of 5 years. Silver Point's incremental borrowing rate is
10%, and it depreciates similar equipment using the double-declining balance
method. The selling price of the equipment is $780,000, and the rate implicit in
the lease is 8%, which is known to Silver Point Co. What is Silver Point's book
value of the leased asset at December 31, 2021? - correct answer
✔$468,000
Correct. Because the lease term is equal to the expected economic life of the
asset, this is a finance lease. Silver Point record the asset at the sales price of
$780,000 less depreciation in 2021. 100% divided by 5 years is 20% per year
or 40% using a double-declining balance method. Therefore, Silver Point's
book value is: [$780,000 - (780,000 x 40%)] = $468,000.
For a lessee with a finance lease containing a bargain purchase option, what
is the lease asset depreciated over? - correct answer ✔The asset's
remaining economic life
What is an advantage of leasing? - correct answer ✔Leases offer protection
against obsolescence
In a finance lease, what does the lessee record? - correct answer
✔Amortization expense and interest expense
rated A+ 2025
What is a major reason why a company may become involved in leasing to
other companies? - correct answer ✔Tax incentives
Which of the following best describes current practice in accounting for
leases? - correct answer ✔All long-term leases are capitalized
What single lease expense is recognized on the income statement? - correct
answer ✔An operating lease
In computing present value of the lease payments, what rate should the
lessee use? - correct answer ✔Use the implicit rate of the lessor, assuming
that the implicit rate is known to the lessee
Which of the following is an advantage of captive leasing companies over the
other players in the leasing market? - correct answer ✔The have the point-
of-sales advantage in finding leasing customers
What is included in the present value for the lease receivable amount? -
correct answer ✔Rental payments plus the present value of guaranteed and
unguaranteed residual values
Which of the following is a correct statement of on e of the classification tests?
- correct answer ✔The lease term is equal to or more than 75% of the
estimated economic life of the leased property
,A lessee had a ten-year finance lease requiring equal annual payments. What
should the reduction of the lease lability in year 2 be equal to? - correct
answer ✔The current liability shown for the lease at the end of year 1
What is the amount to be recorded as the cost of an asset under a finance
lease is equal to? - correct answer ✔Present value of the lease payments
In computing amortization of a leased asset where there is no bargain
purchase option, what should the lessee subtract? - correct answer ✔No
residual value and depreciate over the term of the lease
In order to be an operating lease, the lease must fail all five of the
classification tests. Which of the following describes the lease term test? -
correct answer ✔If the lease term is 75% or more of the economic life, it is a
finance lease
In an operating lease, what does the lessee record? - correct answer
✔Lease expense
Hull Co bought equipment and immediately leased it to Riggs company on
May 1, 2021. At that time, the collectibility of the lease payments was not
probable. The lease expires on May 1, 2022. Riggs could have bough the
equipment from Hull for $5,600,000 instead of leasing it. Hull's accounting
records showed a book value for the equipment on May 1, 2021, of
$4,900,000. Hull's depreciation on the equipment in 2021 was $630,000.
During 2021, Riggs paid $1,260,000 in rentals to Hull for the 8 month period.
Hull incurred maintenance and other related costs under the terms of lease of
$112,000 in 2021. After the lease with Riggs expires, Hull will lease the
equipment to another company for two years. What is Hull's income before
taxes related to this lease for the year ended December 31, 2021? - correct
answer ✔$518,000
Correct. This is an operating lease because the lease does not pass any of
the classification tests. (1) The ownership of the asset remains with Hull, (2)
,there is no purchase option, (3) the lease term is less than 75% of the
economic life of the asset, (4) the total payments (and therefore the present
value of the payments) of $1,260,000 is less than the fair value of the asset of
$5,600,000, and (5) the asset is not specialized and is expected to have an
alternate use after the end of Riggs' lease term. Therefore, the Hulls' revenue
related to the lease with Riggs is the number of lease payments less any
expenses related to the leased asset. $1,260,000 - $112,000 - $630,000 =
$518,000.
Which of the following would be included in the Lease Receivable account? I.
Guaranteed residual value. II. Unguaranteed residual value. III. Executory
costs IV. Rental payments. - correct answer ✔I, II, and IV
A lessor with a sales-type lease involving an unguaranteed residual value at
the end of the lease term will report sales revenue in the period of inception of
the lease at which of the following amounts? - correct answer ✔The sales
price less the present value of the residual value.
How should the Lease Liability account should be disclosed as? - correct
answer ✔Current portions in current liabilities and the remainder in
noncurrent liabilities
Metcalf Company leases a machine from Vollmer Corp. under an agreement
that meets the criteria to be a finance lease for Metcalf. The six-year lease
requires payment of $170,000 at the beginning of each year, including
$25,000 per year for maintenance, insurance, and taxes. The incremental
borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is
known by the lessee. The present value of an annuity due of $170,000 for six
years at 8% is $848,761. The present value of an annuity due of $170,000 for
six years at 10% is $814,435. The present value of an annuity due of
$145,000 for six years at 8% is $723,943. The present value of an annuity due
of $145,000 for six years at 10% is $694,664. At which value should Metcalf
record the leased asset? - correct answer ✔$848,761
, Correct. The lessor sets the terms of the lease and, therefore, the lessor's rate
of 8% is used. Metcalf's lease payable will include amounts associated with
maintenance, insurance, and taxes. Those amounts would be expenses in the
period the payment is made. Therefore, Metcalf should report the leased
asset on its balance sheet at $848,761.
Haystack, Inc. manufactures machinery used in the mining industry. On
January 2, 2021, it leased equipment with a cost of $480,000 to Silver Point
Co. The 5-year lease calls for a 10% down payment and equal annual
payments of $175,820 at the end of each year. The equipment has an
expected useful life of 5 years. Silver Point's incremental borrowing rate is
10%, and it depreciates similar equipment using the double-declining balance
method. The selling price of the equipment is $780,000, and the rate implicit in
the lease is 8%, which is known to Silver Point Co. What is Silver Point's book
value of the leased asset at December 31, 2021? - correct answer
✔$468,000
Correct. Because the lease term is equal to the expected economic life of the
asset, this is a finance lease. Silver Point record the asset at the sales price of
$780,000 less depreciation in 2021. 100% divided by 5 years is 20% per year
or 40% using a double-declining balance method. Therefore, Silver Point's
book value is: [$780,000 - (780,000 x 40%)] = $468,000.
For a lessee with a finance lease containing a bargain purchase option, what
is the lease asset depreciated over? - correct answer ✔The asset's
remaining economic life
What is an advantage of leasing? - correct answer ✔Leases offer protection
against obsolescence
In a finance lease, what does the lessee record? - correct answer
✔Amortization expense and interest expense
