ACC305 Final Exam: Leasing, Accounting Policies, and Financial Reporting

Name: ACC305 Final Exam: Leasing, Accounting Policies, and Financial Reporting
Brand: Kaplan University School of Business and Management
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Author: Olivia Smith

A final exam on leasing and financial reporting.

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ACC305 Final Exam: Leasing, Accounting Policies, and Financial Reporting
Strayer acc305 Final Exam Part 1
Question 1
Which of the following statements is true when comparing the accounting for leasing
transactions under U.S. GAAP with IFRS?
The IFRS leasing standard is the subject of over 30 interpretations since its issuance in 1982.
IFRS for leases is more "rules-based" than U.S. GAAP and includes many bright-line criteria to
determine ownership.
IFRS does not provide detailed guidance for leases of natural resources,sale-leasebacks, and
leveraged leases.
IFRS requires that companies provide a year-by-year breakout of future noncancelable lease
payments due in years 1 through 5.
Question 2
A lessor with a sales-type lease involving an unguaranteed residual value available to the lessor
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?
The minimum lease payments plus the unguaranteed residual value.
The present value of the minimum lease payments.
The cost of the asset to the lessor, less the present value of any unguaranteed residual value.
The present value of the minimum lease payments plus the present value of the unguaranteed
residual value.
Question 3
Which of the following is an advantage of leasing?
Off-balance-sheet financing
Less costly financing
100% financing at fixed rates
All of these
Question 4
Which of the following is a correct statement of one of the capitalization criteria?
The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value
of the leased property.
The lease transfers ownership of the property to the lessor.
The lease contains a purchase option.
The lease term is equal to or more than 75% of the estimated economic life of the leased
property.
Question 5
Hull Co. leased equipment to Riggs Company on May 1, 2013. At that time the collectibility of
the minimum lease payments was not reasonably predictable. The lease expires on May 1, 2014.
Riggs could have bought the equipment from Hull for $4,000,000 instead of leasing it. Hull's
accounting records showed a book value for the equipment on May 1, 2010, of $3,500,000.
Hull's depreciation on the equipment in 2013 was $450,000. During 2013, Riggs paid $900,000
in rentals to Hull for the 8-month period. Hull incurred maintenance and other related costs under
the terms of the lease of $80,000 in 2013. After the lease with Riggs expires, Hull will lease the
equipment to another company for two years.

Ignoring income taxes, the amount of expense incurred by Riggs from this lease for the year
ended December 31, 2013, should be
$360,000.
$900,000.
$296,000.
$656,000.
Question 6
Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on July
1, 2013. The lease is appropriately accounted for as a sale by Metro and as a purchase by Sands.
The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2023. The first of
10 equal annual payments of $828,000 was made on July 1, 2013. Metro had purchased the
equipment for $5,200,000 on January 1, 2013, and established a list selling price of $7,200,000
on the equipment. Assume that the present value at July 1, 2013, of the rent payments over the
lease term discounted at 8% (the appropriate interest rate) was $6,000,000.
What is the amount of profit on the sale and the amount of interest income that Metro should
record for the year ended December 31, 2013?
$0 and $206,880
$800,000 and $240,000
$1,200,000 and $480,000
$800,000 and $206,880
Question 7
Haystack, Inc. owns 30% of the outstanding stock of Hallmark, Inc. and accordingly uses the
equity method to account for its investment. The stock was purchased on January 1, 2013 for
$780,000. During the year ended December 31, 2013, Hallmark, Inc. reported the following:
Dividends declared and paid $ 400,000
Net income 2,400,000
Haystack, Inc. uses the FIFO method for costing its inventories, while Hallmark, Inc. uses the
LIFO method to conform with other companies in its industry. Haystack, Inc. determines that if
Hallmark, Inc. had used the FIFO method, its income would have been $350,000 higher during
2013. What is the balance in the Investment in Hallmark, Inc. that will be reported on Haystack,
Inc.'s balance sheet at December 31, 2013 assuming Haystack, Inc. follows U.S. GAAP for its
external financial reporting?
$1,725,000
$1,485,000
$1,275,000
$1,380,000
Question 8
Link Co. purchased machinery that cost $1,350,000 on January 4, 2011. The entire cost was
recorded as an expense. The machinery has a nine-year life and a $90,000 residual value. The
error was discovered on December 20, 2013. Ignore income tax considerations.
Link's income statement for the year ended December 31, 2013, should show the cumulative
effect of this error in the amount of
$930,000.
$1,210,000.
$1,070,000.
$0.

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Kaplan University School of Business and Management

Subject

Accounting

ACC305 Final Exam: Leasing, Accounting Policies, and Financial Reporting

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