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BIF 201-3: Financial Accounting and Reporting III

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On January 1, Year One, Green Company leases a machine for four years. Because Green is a relatively new business and is struggling with its cash flows, the lessor sets the payments as $10,000 per year for the first two years and $20,000 for the last two years. These payments were computed based on an implicit interest rate of 10 percent per year. The contract does not meet any of the five criteria to be reported as a finance lease. What amount of expense should Green recognize in Year Two? F
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A 10-year lease is entered into for equipment with an economic life of 12 years. There is no ownership transfer or purchase option. The present value of payments is 88% of fair value. This lease is classified as? C
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Which of the following is NOT a criterion for a lease to be classified as a finance lease by a lessee? C
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On January 1, 20X0, a company leases equipment for 8 years although the equipment has a life of 10 years. At the end of that time, the asset will be returned to the lessor. Payments are $10,000 per year on January 1 with the first one made immediately. The present value of these payments at the lessee's incremental borrowing rate of 10 percent per year is assumed to be $58,000. What amount of amortization expense should the lessee recognize for 20X0? F
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Company X leased equipment for 4 years with annual payments of $10,000 payable at the beginning of each year. At 6% interest:

PV factor for ordinary annuity of 4 years is 3.465

PV factor for annuity due of 4 years is 3.673

What is the initial lease liability? C

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On April 1, Year 1, Hall Fitness Center leased its gym to Dunn Fitness Center under a 4-year operating lease. Hall normally charges $6,000 per month to lease its gym, but as an incentive, Hall gave Dunn half off the first year's rent and one-quarter off the second year's rent. Dunn's rental payments were as follows:

Year 1 - 12 x $3,000 equals $36,000

Year 2 - 12 x $4,500 equals $54,000

Year 3 - 12 x $6,000 equals $72,000

Year 4 - 12 x $6,000 equals $72,000

Dunn's rent payments were due on the first day of the month, beginning on April 1, Year 1. What amount should Dunn report as rent expense in its monthly income statement for April, Year 3? F

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On January 1, Year 2, a lessee enters into a three-year asset operating lease

with annual payments of $18,000 per year. The first payment will be made December 31 and the interest rate implicit in the lease is 5.75 percent. (The present value of an ordinary annuity for three years at 5.75% is 2.685424. and present value of annuity due for 3 years at 5.75% is 3.362). What amount will lessee record ROUA as? B

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A lessor would recognize which of the following for an operating lease? C
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At the beginning of Year 2, Kennedy enters into a four-year operating lease with payments due at the end of the year beginning on December 31, Year 2. The rate implicit in the lease is 4.50 percent and Kennedy will owe annual payments of $5,200. The present value factor of an ordinary annuity for four years at 4.50 percent is equal to 3.5875. The carrying value of the ROU asset at the end of Year 2 will be closest to? B
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Larkins, Inc. leases equipment from Bostic for $30,000 per year for three years. The contract is signed on Dec 31, 20X0 and the first payment is made immediately. The second payment will be made on Dec 31, 20X1. This lease contract does not meet any of the five criteria for a finance lease.

Larkins has an incremental borrowing rate of 10 percent. The present value factor for a $1 ordinary annuity at 10% for 2 years is 1.736 and for 3 years the factor is 2.487. What liability should Larkins report on its December 31, 20X1 balance sheet? F

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