Question

Generally accepted accounting principles require that certain lease agreements be accounted for as purchases. The theoretical basis for this treatment is that a lease of this type

a.	effectively conveys all of the benefits and risks incident to the ownership of property.
b.	is an example of form over substance.
c.	provides the use of the leased asset to the lessee for a limited period of time.
d.	must be recorded in accordance with the concept of cause and effect.

Equal monthly rental payments for a particular lease should be charged to Rental Expense by the lessee for which of the following?

      Capital Lease         Operating Lease

a.	Yes            No
b.	Yes            Yes
c.	No             No
d.	No             Yes

Wrench Repairs acquires equipment under a noncancelable lease at an annual rental of $45,000, payable in advance for five years. After five years, there is a bargain purchase option of $75,000. The appropriate interest rate is 12 percent. What is the total present value of the lease and the first year's interest expense?

a.	$224,234 and $26,908
b.	$224,234 and $21,508
c.	$204,771 and $21,508
d.	$204,771 and $19,173

On January 1, Landau Company signed a ten-year noncancelable lease for a new machine, requiring $45,000 annual payments at the beginning of each year. The machine has a useful life of 15 years, with no salvage value. Title passes to Landau at the lease expiration date. Landau uses straight-line depreciation for all of its plant assets. Aggregate lease payments have a present value on January 1 of $352,000, based on an appropriate rate of interest. For the first year, Landau should record depreciation (amortization) expense for the leased machine at

a.	$45,000
b.	$35,200
c.	$23,467
d.	$21,533

On January 1, 2014, Bullitt Corporation sold a machine to Sting Corporation and simultaneously leased it back for ten years. The following information is available regarding the lease:

	Estimated remaining useful life at December 31, 2013					10 years
	Sales price					$     90,000
	Carrying value at December 31, 2013					$     52,500
	Annual rental under leaseback					$     14,600
	Interest rate implicit in the lease					10%
	Present value of the lease rentals					$     89,711
	($14,600 for 10 years at 10%)

How much profit should Bullitt recognize on January 1, 2014, on the sale of the machine?

a.	$0.
b.	$37,211
c.	$90,000
d.	$37,500

Selected financial data of Nicholas Corporation for the year ended December 31, 2014, is presented below:

Operating income ......................................	$800,000
Interest expense ......................................	(150,000)
Income before income tax ..............................	$650,000
Income tax expense ....................................	(220,000)
Net income ............................................	$430,000
Preferred stock dividends .............................	(200,000)
Net income available to common stockholders ...........	$230,000

Common stock dividends were $120,000. The times-interest-earned ratio is

a.	2.9 to 1.
b.	3.6 to 1.
c.	4.3 to 1.
d.	5.3 to 1.

Form 1040 allows a taxpayer to report which of the following items that are not allowed for taxpayers who file Form 1040A:

	a.	Salary income.
	b.	Joint return status.
	c.	Withholding on wages.
	d.	Self-employment income.

Oscar and Mary have no dependents and file a joint income tax return for 2016. They have adjusted gross income of $140,000 and itemized deductions of $30,000. What is the amount of taxable income that Oscar and Mary must report on their 2016 income tax return?

	a.	$97,400
	b.	$101,900
	c.	$102,000
	d.	$110,000
	e.	$136,000

As a Christmas thank you for being a good employee, Ed's TV Repair gave 62-year-old Edwina three shares of its stock worth $20 per share. Edwina then received dividends of $1 per share related to the stock. How much should be included in Edwina's gross income?

	a.	$0
	b.	$3
	c.	$60
	d.	$63
	e.	None of the above

Elmer received the following distributions from Virginiana Mutual Fund for the calendar year 2016: Ordinary dividends $250 Capital gain distributions $170 Nontaxable distributions $ 80 Elsie, Elmer's wife, did not own any of the Virginiana Mutual Fund shares, but she did receive $1,475 in interest on a savings account at the Moss National Bank and $175 in interest on California Municipal Bonds. Elmer and Elsie filed a joint income tax return for 2016. What amount is reportable as taxable interest income? a. $0 b. $175 c. $1,475 d. $1,650 e. None of the above Marie had a good year. She received the following prizes and awards: - an iPad from The Famous Daytime Talk Show with a fair market value of $500 - lottery winnings of $1,000 received in cash - a plaque worth $25 plus $100 of Godiva chocolate in recognition for 100 days on the job without an accident - a $10,000 cash prize from American Idol? How much of her prizes and awards should Marie report on her tax return? a. None, they are all excluded from income b. $11,000; only cash prizes and awards are included c. $11,500; the award from her job is excluded d. $11,700; the plaque may be excluded e. $11,725; everything is included at the highest amount Which of the following gifts or prizes would be considered taxable income to the person receiving the gift? a. $5,000 given to the taxpayer by his friend b. A mobile home given to the taxpayer by his mother c. A ski boat won by the taxpayer on the Price is Right game show d. A Mustang GT given to the taxpayer by his brother e. None of the above would be considered taxable Richard, who retired on April 30, 2016, receives a monthly employee annuity benefit of $1,400 payable for life, beginning May 1, 2016. During his years of employment, Richard contributed $29,400 to the company's plan. Richard's age on May 1 is 66. Using the simplified method, how much of the $11,200 annuity payment received during 2016 may Richard exclude from gross income? a. $427 b. $1,120 c. $1,680 d. $11,200 e. None of the above

Answer 1

Answer 1:

Option a is correct.

Generally accepted accounting principles require that certain lease agreements be accounted for as purchases. The theoretical basis for this treatment is that a lease of this type effectively conveys all of the benefits and risks incident to the ownership of property.

Answer 2:

Option d is correct.

Equal monthly rental payments for a particular lease should not be charged to rental expenses by the lessee in a capital lease. Equal monthly rental payments for a particular lease should be charged to rental expenses by the lessee in a operating lease.

Answer 3:

Option b is correct.

Set to BEG of period, -75,000 = FV, -45,000 = PMT, 5 = N, 12 = i%, CPT = PV = 224,234

In Excel, the formula is: =PV(12%,5,-45000,-75000,1)

To compute the first year’s interest, you begin with the total present value before the first payment. You then subtract out the first payment, which, since it was made on the first day, didn’t include any interest. That number is then multiplied by the interest rate as follows: $224,234 – $45,000 = $179,234 × 0.12 = $21,508

Answer 4:

Option c is correct.

Depreciation expense = $352,000/15

Depreciation expense = $23,467