Problem 11 – 6 Multiple Choice (AICPA Adapted)

1. At the beginning of the current year, a lessee signs a 7 year lease for equipment
having a 10 year economic life. The present value of the minimum lease payments
equaled 80% of the equipment fair value. The lease agreement provides for neither a
transfer of title to the lessee nor a bargain purchase option. In the current year’s
income statement, the lessee shall report

a. Rent expense equal to the lease payment in the current year

b. Rent expense equal to the lease payment in the current year less interest
c. Lease amortization equal to one tenth of the equipment’s fair value
d. Lease amortization equal to one tenth of 80% o the equipment’s fair value

2. An entity leased a tractor and a truck. The tractor lease does not include a bargain
purchase option but the lease term is equal 90% of the tractor’s economic life. The
truck lease does not transfer ownership of the truck to the entity by the end of the
lease term but the lease term is equal to 75% of the truck’s economic life. How shoul
the entity classify this leases?

a. Both lease should be classified as finance lease

b. An operating lease for a tractor lease and as a finance lease for the truck lease
c. Both the tractor and the truck leases should be classified as operating lease
d. The tractor lease should be classified as finance lease and the truck lease as
operating lease

3. At the beginning of the current year, an entity made long- term improvements to a
recently leased building. The lease agreement provides for neither a transfer of title
nor a bargain purchase option. The present value of the minimum lease payments
equals 85% of the building’s fair value, and the lease term equals 70% of the
building’s economic life. The lessee should recognize an asset for

a. Building
b. Leasehold improvement
c. Both building and leasehold improvement
d. Neither building and leasehold improvement

4. The lessee’s lease liability for a finance lease would be periodically reduced by

a. Minimum lease payment plus depreciation of the related asset

b. Minimum lease payment less depreciation of the related asset
c. Minimum lease payment less the portion allocable to interest
d. Minimum lease payment

5. A six year finance lease entered into on December 31 of the current year specified
 equal minimum lease payments due on December 31 of each year. The first
minimum lease payment paid on December 31 of the current year consist which
of the following?

I. Interest expense
II. Lease liability

a. I only
b. II only
c. Both I and II
d. Neither I nor II

6 . A six year finance lease entered into on December 31 of the current year specified
equal minimum lease payments due on December 31 of each year, the first payment
being paid December 31 of the current year. The portion of the third minimum
lease payment applicable to which of the following increased over the
corresponding second minimum lease payments?

I. Interest expense
II. Reduction of lease liability

a. I only
b. II only
c. Both I and II
d. Neither I nor II

7. A lease had a ten year finance lease requiring equal minimum annual payments . the
reduction of the lease liability in year 2 should equal

a. The current liability shown for the lease at the end of year 1
b. The current liability shown for the lease at the end of year 2
c. The reduction of the lease liability in year 1
d. One tenth of the original lease liability

8. A six year finance lease specifies equal minimum annual lease payments. Part of this
payment represents interest and part represents a reduction in the lease liability. The
portion of the minimum lease liability in the fifth year applicable to the reduction of
the lease liability should be

a. Less than in the fourth year

b. More than in the fourth year
c. The same in the sixth year
d. More than in the sixth year
9. The present value of the minimum lease payments should be used by the lessee in the
determination of

a. Finance lease liability

b. Operating lease liability
c. Both finance lease liability and operating lease liability
d. Neither finance lease liability nor operating lease liability

10. For which of the following transactions would be use of present value of an annuity
due concept be appropriate in calculating the present value of cash flows?

a. A finance lease is entered into with the initial payment due in one month
subsequent to the signing of the lease
b. A finance lease is entered into with the initial payment due upon signing of the
lease
c. A ten year 8% bond is issued on January 1 with interest payable semiannually on
January 1 and July 1 yielding 7%
d. A ten year 8% bond is issued on January 1 with interest payable semiannually on
January 1 and July 1 yielding 9%