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

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ACC305 Final Exam: Leasing, Accounting Policies, and Financial ReportingStrayer acc305 Final Exam Part 1Question 1Which of the following statements is true when comparing the accounting for leasingtransactions 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 todetermine ownership.IFRS does not provide detailed guidance for leases of natural resources,sale-leasebacks, andleveraged leases.IFRS requires that companies provide a year-by-year breakout of future noncancelable leasepayments due in years 1 through 5.Question 2A lessor with a sales-type lease involving an unguaranteed residual value available to the lessorat the end of the lease term will report sales revenue in the period of inception of the lease atwhich 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 unguaranteedresidual value.Question 3Which of the following is an advantage of leasing?Off-balance-sheet financingLess costly financing100% financing at fixed ratesAll of theseQuestion 4Which 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 valueof 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 leasedproperty.Question 5Hull Co. leased equipment to Riggs Company on May 1, 2013. At that time the collectibility ofthe 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'saccounting 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 $900,000in rentals to Hull for the 8-month period. Hull incurred maintenance and other related costs underthe terms of the lease of $80,000 in 2013. After the lease with Riggs expires, Hull will lease theequipment to another company for two years.

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Ignoring income taxes, the amount of expense incurred by Riggs from this lease for the yearended December 31, 2013, should be$360,000.$900,000.$296,000.$656,000.Question 6Metro Company, a dealer in machinery and equipment, leased equipment to Sands, Inc., on July1, 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 of10 equal annual payments of $828,000 was made on July 1, 2013. Metro had purchased theequipment for $5,200,000 on January 1, 2013, and established a list selling price of $7,200,000on the equipment. Assume that the present value at July 1, 2013, of the rent payments over thelease 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 shouldrecord 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 $206,880Question 7Haystack, Inc. owns 30% of the outstanding stock of Hallmark, Inc. and accordingly uses theequity 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 $ 400,000Net income 2,400,000Haystack, Inc. uses the FIFO method for costing its inventories, while Hallmark, Inc. uses theLIFO method to conform with other companies in its industry. Haystack, Inc. determines that ifHallmark, Inc. had used the FIFO method, its income would have been $350,000 higher during2013. 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 itsexternal financial reporting?$1,725,000$1,485,000$1,275,000$1,380,000Question 8Link Co. purchased machinery that cost $1,350,000 on January 4, 2011. The entire cost wasrecorded as an expense. The machinery has a nine-year life and a $90,000 residual value. Theerror was discovered on December 20, 2013. Ignore income tax considerations.Link's income statement for the year ended December 31, 2013, should show the cumulativeeffect of this error in the amount of$930,000.$1,210,000.$1,070,000.$0.

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