Q: A company enters into a lease with annual payments of $$26,380 for 5 years at an implicit rate of 10%. What is the present value of the lease payments using the annuity factor $$PVFA(10 ext{\%},5) = 3.7908$?

$$26,380 \times 3.7908 = 100,001$$

Q: A lease has annual payments of $$80,000 for 5 years at 8% interest. The fair value of the asset is 600$$,000. Using $$PVFA(8 ext{\%},5) = 3.9927$$, what percentage of the fair value does the present value of lease payments represent?

$$80,000 \times 3.9927 = 319,417$$, which is 53% of $$600,000$$

Q: A lease agreement requires annual payments of $$20,034 for 5 years at 8% interest, with a guaranteed residual value of 20$$,000. What is the present value of the minimum lease payments for the lessor using $$PVFA(8 ext{\%},4) = 4.312127$$?

$$20,034 \times 4.312127 + \frac{20,000}{1.085} = 100,001$$

Q: A lease has annual payments of $$11,000 for 10 years at 7% interest, a bargain purchase option of 20$$,000, and a fair value of $$100,000. What is the present value of minimum lease payments using $$PVFA(7 ext{\%},9) = 7.515232$?

$$11,000 \times 7.515232 + \frac{20,000}{1.0710} = 92,835$$

Question 1

Which of the following criteria would most likely result in a lease being classified as a finance (capital) lease under ASPE?

Accepted Answer

The lease contains a bargain purchase option and the present value of lease payments comprises substantially all of the fair value of the asset.

Question 2

A company enters into a lease with annual payments of $$26,380 for 5 years at an implicit rate of 10%. What is the present value of the lease payments using the annuity factor $$PVFA(10	ext{\%},5) = 3.7908$?

Accepted Answer

$$26,380 	imes 3.7908 = 100,001$$

Question 3

Which formula is used to calculate the present value factor for an ordinary annuity when the rate is not found in factor tables?

Accepted Answer

$$PVFA(r, t) = \frac{1}{r} - \frac{1}{r(1 + r)^t}$$

Question 4

A lease has annual payments of $$80,000 for 5 years at 8% interest. The fair value of the asset is 600$$,000. Using $$PVFA(8	ext{\%},5) = 3.9927$$, what percentage of the fair value does the present value of lease payments represent?

Accepted Answer

$$80,000 	imes 3.9927 = 319,417$$, which is 53% of $$600,000$$

Question 5

Which of the following best describes the impact of a lease that transfers substantially all risks and rewards of ownership to the lessee?

Accepted Answer

The lessee records the asset as a right-of-use asset and the lease liability on its books.

Question 6

A lease agreement requires annual payments of $$20,034 for 5 years at 8% interest, with a guaranteed residual value of 20$$,000. What is the present value of the minimum lease payments for the lessor using $$PVFA(8	ext{\%},4) = 4.312127$$?

Accepted Answer

$$20,034 	imes 4.312127 + \frac{20,000}{1.085} = 100,001$$

Question 7

Which of the following statements about the effective interest rate in lease accounting is correct?

Accepted Answer

It is typically solved using a financial calculator or spreadsheet through an iterative approach.

Question 8

A lease has a bargain purchase option of $$20,000, annual payments of 19$$,000 for 5 years, and a fair value of $$100,000. If the present value of minimum lease payments is 102$$,044, what should the lessee record as the asset under capital lease?

Accepted Answer

$$100,000$$

Question 9

Which scenario is most likely to create a moral hazard in lease accounting?

Accepted Answer

A lease where the lessee does not have economic control of the asset.

Question 10

A company leases equipment for 5 years with annual payments of $$13,000 at 8% interest. The fair value of the asset is 100$$,000. If the present value of lease payments is $56,058, how should the lease be classified?

Accepted Answer

Operating lease, because PVMLP is less than 90% of fair value.

Question 11

A lease has annual payments of $$11,000 for 10 years at 7% interest, a bargain purchase option of 20$$,000, and a fair value of $$100,000. What is the present value of minimum lease payments using $$PVFA(7	ext{\%},9) = 7.515232$?

Accepted Answer

$$11,000 	imes 7.515232 + \frac{20,000}{1.0710} = 92,835$$

Question 12

When calculating the present value of lease payments for a lessee under ASPE, which rate should be used if the implicit rate is not known?

Accepted Answer

The lessee's incremental borrowing rate.

Question 13

A company leases an asset with annual payments of $$16,000 for 6 years at 10% interest and a guaranteed residual value of 5$$,000. Using $$PVFA(10	ext{\%},5) = 4.7908$$, what is the present value of the lease payments?

Accepted Answer

$$16,000 	imes 4.7908 + \frac{5,000}{1.106} = 79,475$$

Question 14

Which of the following is NOT included in the minimum lease payments for the lessor under ASPE?

Accepted Answer

Unguaranteed residual value.

Question 15

A company leases an asset for 5 years with annual payments of $$23,104 at 10% interest and a guaranteed residual value of 20$$,000. What is the present value of minimum lease payments for the lessor using $$PVFA(10	ext{\%},5) = 3.7908$$?

Accepted Answer

$$23,104 	imes 3.7908 + \frac{20,000}{1.105} = 100,000$$

Question 16

If a lease does not transfer substantially all risks and rewards of ownership, which party should maintain the asset on its books?

Accepted Answer

The lessor.

Question 17

A company leases an asset with annual payments of $$50,000 for 5 years at 8% interest. Using $$PVFA(8	ext{\%},4) = 4.312127$, what is the present value of the lease payments?

Accepted Answer

$$50,000 	imes 4.312127 = 215,606$$

Question 18

Which of the following is a reason a company might prefer to lease rather than purchase an asset?

Accepted Answer

The asset has no expected value at the end of the lease and leasing is slightly cheaper in terms of present value.

Question 19

A company leases an asset with a down payment of $$50,000, annual payments of 80$$,000 for 8 years at 4% interest, and an expected payout under a residual value guarantee of $$20,000. Using $$PVFA(4	ext{\%},7) = 7.002055$, what is the total present value of lease payments?

Accepted Answer

$$50,000 + 80,000 	imes 7.002055 + \frac{20,000}{1.048} = 624,778$$

Step-by-Step Guidance for Accounting for Leases (Chapter 17)

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