Name ____________________________

AC 211 Intermediate Accounting II Chapter 15 Quiz 15 points

Select the best answer for each of the matching questions by placing the appropriate letter in the space provided. Select the best answer for each of the multiple choice questions by circling the appropriate letter. Matching questions are worth 1 point each, multiple choice questions 1-2 and 67 are worth 1 point each, and multiple choice questions 3-5 are worth 2 points each. Show all work as partial credit may be given. MATCHING Listed below are five terms followed by a list of phrases that describe or characterize the five terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase. Terms: A. B. C. D. E. Additional conditions for lessor in nonoperating leases Bargain purchase option Present value of minimum lease payments Capital lease Depreciation period longer than lease term

Phrases: 1. ____ The amount capitalized by lessee. 2. ____ Title transfers to lessee. 3. ____ Accounting for these is based on substance over form 4. ____ Consistent with the realization principle. 5. ____ Purchase price sufficiently less than the expected fair market value when exercised.

MULTIPLE CHOICE Use the following to answer questions 1-4: Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2006. The manufacturing cost of the computers was $12 million. This non-cancelable lease had the following terms: Lease payments: $2,466,754 semiannually; first payment at January 1, 2006; remaining payments at June 30 and December 31 each year through June 30, 2010. Lease term: 5 years (10 semi-annual payments) No residual value; no bargain purchase option Economic life of equipment: 5 years Implicit interest rate and lessee's incremental borrowing rate: 5% semi-annually Fair value of the computers at 1/1/06: $20 million Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred. 1. Technoid would account for this as: A) B) C) D) 2. A capital lease. A direct financing lease. A sales type lease. An operating lease.

Lone Star Company would account for this as: A) B) C) D) A capital lease. A direct financing lease. A sales type lease. An operating lease.

3.

What is the net carrying value of the lease liability in Lone Star's 6/30/06 balance sheet? Round your answer to the nearest dollar. A) B) C) D) $15,943,154 $17,533,246 $21,000,000 None of the above is correct.

4.

What is the interest revenue that Technoid would report on this lease in its 2006 income statement? A) B) C) D) $0 $1,673,820 $876,882 None of the above is correct.

5.

On February 1, 2006, Pearson Corporation became the lessee of equipment under a fiveyear, noncancelable lease. The estimated economic life of the equipment is 8 years. The fair market value of the equipment was $600,000. The lease does not meet the definition of a capital lease in terms of a bargain purchase option, transfer of title, or the lease term. However, Pearson must classify this as a capital lease if the present value of the minimum lease payments is at least A) B) C) D) $600,000. $540,000. $450,000. $405,000.

6.

If the lessor retains title to leased property under the terms of the lease: A) The amount to be recovered through periodic lease payments is reduced by the present value of the residual amount. B) The amount to be recovered through periodic lease payments is increased by the present value of the residual amount. C) The amount to be recovered will be the same as if there were no residual value. D) The lessor will record a greater amount of depreciation due to the residual value.

7.

From the perspective of the lessee, leases may be classified as either: A) B) C) D) Direct financing or sales-type. Capital or direct financing. Capital or operating. Direct financing or operating.