1. Exhibit 20-3

On January 1, 2016, Quinn Company enters into a five-year sales-type lease with Andy Company. The lease requires Andy to make five annual payments at the beginning of the year, with the first payment due January 1, 2016. The lease includes a bargain purchase price of $10,000. Quinn requires a 10% rate of return. The cost to Quinn of the property is $100,000, and it has a fair value of $150,000. Present value factors for a 10% interest rate are as follows:

Present value of $1 for n = 1	0.909091
Present value of $1 for n = 5	0.620921
Present value of an ordinary annuity for n = 5	3.790787
Present value of an annuity due for n = 5	4.169865

​

Refer to Exhibit 20-3. What is the amount of sales revenue to be recognized by Quinn on January 1, 2016,?

	a.	$0
	b.	$143,791
	c.	$150,000
	d.	$50,000

2.4 points   

QUESTION 2

1. Which of the following statements concerning direct financing leases is true?

	a.	Initial direct costs result in an increase in Unearned Interest Revenue-Leases by an amount equal to these costs in the year the costs are incurred.
	b.	The lessor’s gross margin is amortized over the life of the lease.
	c.	The net investment in the lease should be adjusted each year by material increases (but not decreases) in estimated unguaranteed residual values.
	d.	The lessor reports  only interest revenue on the income statement.

2.4 points   

QUESTION 3

1. Exhibit 20-5
   The Baltimore, Inc. entered into a five-year lease with the Waugh Chapel Company on January 1, 2016. Baltimore, the lessor, will require that five equal annual payments of $25,000 be made at the beginning of each year. The first payment will be made on January 1, 2016. The lease contains a bargain purchase option price of $12,000, which the lessee may exercise on December 31, 2020. The lessee pays all executory costs. The cost of the leased property and its normal selling price are $95,000 and $118,236, respectively. Collectibility of the future lease payments is reasonably assured, and the lessor does not expect to incur any future costs related to the lease. Present value factors for a 7% 

Present value of $1 for n = 1	0.934579
Present value of $1 for n = 5	0.712986
Present value of an ordinary annuity for n = 5	4.100197
Present value of an annuity due for n = 5	4.387211

• ​
•  
• Refer to Exhibit 20-5. If Baltimore requires a 7% annual return, what is the correct amount that should be credited to Unearned Interest: Leases on January 1, 2016, by Baltimore (round the answer to the nearest dollar)?

	a.	$15,320
	b.	$43,236
	c.	$18,764
	d.	$22,495

2.4 points   

QUESTION 4

1. The lessor should report the Lease Receivable for a sales-type lease on its balance sheet as

	a.	only a note to the financial statements.
	b.	a current asset.
	c.	a long-term asset.
	d.	a current asset for the current portion and a long-term asset for the remaining amount.

2.4 points   

QUESTION 5

1. Executory costs

	a.	are always paid by the lessee.
	b.	should normally be borne by the party that is, in substance, the owner of the asset.
	c.	are included in the minimum lease payments by the lessee.
	d.	are the costs incurred by the lessor that are directly associated with negotiating and completing the lease transaction.

2.4 points   

QUESTION 6

1. A lease must be treated as a direct financing lease by the lessor when at least one of the four basic criteria is met, collectability of the minimum lease payments is reasonably assured, no uncertainties surround the amount of the unreimbursable costs, and

	a.	the lessor is a financial institution.
	b.	the lease agreement contains a provision for unguaranteed residual value.
	c.	the interest revenue element is determined in such a manner as to produce a constant rate of return on the net investment of the lease.
	d.	the lessor does not have a dealer profit or loss.

2.4 points   

QUESTION 7

1. Which of the following items should be included in the calculation of the lessor’s gross receivable?

	Periodic Lease	Executory Costs	Unguaranteed
	Rental Payments	Paid by Lessee	Residual Value
I.	Yes	Yes	Yes
II.	Yes	Yes	No
III.	Yes	No	No
IV.	Yes	No	Yes

• ​

	a.	I
	b.	II
	c.	III
	d.	IV

2.4 points   

QUESTION 8

1. Which of the following cash flows is classified as an investing cash flow?

	a.	payment received under an operating lease
	b.	purchase of an asset leased under a sales-type lease
	c.	interest portion of payment received under a direct financing lease
	d.	reduction of a direct financing lease receivable

2.4 points   

QUESTION 9

1. If a lease is classified as a capital lease because the lease agreement contains a bargain purchase option, the time period to be used by the lessee to amortize the leased property is

	a.	the maximum amortization period for intangible assets.
	b.	the expected economic life of the property.
	c.	the lease term or the expected economic life of the property, whichever is shorter.
	d.	the lease term.

2.4 points   

QUESTION 10

1. On January 1, 2016, Luke, Inc. leased equipment, signing a five-year lease that requires five payments of $40,000 due on January 1 of each year with the first payment due January 1, 2016. Luke accounted for the lease as a capital lease. Using a rate of 9%, Luke determined the present value on January 1, 2016, to be $169,589. What is the amount of the long-term lease obligation that Luke should report on its December 31, 2017 balance sheet?

	a.	$112,915
	b.	$70,364
	c.	$129,589
	d.	$101,252

2.4 points   

QUESTION 11

1. Costs of maintaining leased property such as insurance, maintenance, and property taxes are referred to as

	a.	executory costs.
	b.	residual value costs.
	c.	participatory costs.
	d.	incremental costs.

2.4 points   

QUESTION 12

1. Which of the following amortization policies is correct for a capital lease of both land and buildings that transfers title or contains a bargain purchase option?

	a.	The total capitalized cost of the lease less any expected residual value is allocated over the lease term.
	b.	An amount is assigned to Leased Buildings that is depreciated over the lease term, and the amount assigned to Leased Land is not depreciated.
	c.	The total capitalized cost of the lease less any expected residual value is allocated over the expected economic life of the assets.
	d.	An amount is assigned to Leased Buildings that is depreciated over the expected economic life of the asset, and the amount assigned to Leased Land is not depreciated.

2.4 points   

QUESTION 13

1. Exhibit 20-4
   On January 1, 2016, Average Leasing Company entered into a direct financing lease with a lessee, Lenny Company. The lease agreement calls for five equal annual payments of $75,000 at the beginning of each year with the first payment due on January 1, 2016. The leased property has an estimated residual value of $10,000, which Lenny does not guarantee. The property remains the property of Average at the end of the lease term. Average desires a 12% rate of return. Present value factors for a 12% interest rate are as follows:

Present value of $1 for n = 1	0.892857
Present value of $1 for n = 5	0.567427
Present value of an ordinary annuity for n = 5	3.604776
Present value of an annuity due for n = 5	4.037349

• ​
•  
• Refer to Exhibit 20-4. What is the amount of interest revenue that Average should recognize on the lease for the year ended December 31, 2016 (round the answer to the nearest dollar)?

	a.	$27,336
	b.	$36,336
	c.	$28,017
	d.	$37,017

2.4 points   

QUESTION 14

1. When callable preferred stock is recalled, if the recall price exceeds the total of the par value in the preferred stock account and the additional paid-in capital associated with the recalled preferred stock, the difference is

	a.	credited to Retained Earnings.
	b.	debited to Retained Earnings.
	c.	credited to Loss from Recall of Preferred Stock.
	d.	credited to Additional Paid-in Capital on Preferred Stock.

2.4 points   

QUESTION 15

1. For a compensatory share option plan, any compensation cost related to the plan must be recognized over the service period. The underlying financial accounting concept that supports this approach is

	a.	conservatism.
	b.	revenue recognition.
	c.	matching.
	d.	historical cost.

2.4 points   

QUESTION 16

1. Under the cost method of accounting for treasury stock transactions, when the proceeds from a sale are greater than the cost, the excess over cost is treated as a(n)

	a.	increase in Other Expenses from Treasury Stock Sales.
	b.	increase in Additional Paid-in Capital from Treasury Stock.
	c.	increase in a contra-shareholders’ equity account.
	d.	None of these choices.

2.4 points   

QUESTION 17

1. The following information is provided for Miller Corporation:

Common stock, $10 par	$340,000
Bonds payable	28,000
Additional paid-in capital from preferred stock conversion	3,000
Retained earnings	100,000
Additional paid-in capital on preferred stock	10,000
Common stock subscribed	30,000
Accumulated other comprehensive income	5,600
Premium on bonds payable	2,000
Preferred stock, 6%, $100 par	80,000

• ​
• What is the amount of contributed capital for Miller Corporation?

	a.	$463,000
	b.	$433,000
	c.	$430,000
	d.	$468,600

2.4 points   

QUESTION 18

1. For a stock appreciation rights (SAR) compensation plan, the measurement date is the date

	a.	when the employees may first exercise the options (SARs).
	b.	of the adoption of the plan.
	c.	on which the options (SARs) are exercised.
	d.	on which the options (SARs) are granted to the employees.

2.4 points   

QUESTION 19

1. Exhibit 15-7
   On January 1, 2016, 70 executives were granted a performance-based share option plan that would award them each a maximum of 300 shares of $5 par common stock for $12 a share based on the increase in sales over the next three years. The fair value per option on the grant date was $16. The award table is as follows:

Increase in Sales	No. of Shares
10%	100
15%	200
20%	300

• The company estimates that the sales increase will be 22% and that the annual employee turnover rate will be 2%.
• ​
•  
• Refer to Exhibit 15-7. In 2017 the actual sales increase was determined to be 18%, and the overall turnover rate was exactly 2%. The compensation expense for 2017 is (to the nearest dollar)

	a.	$210,828.
	b.	$70,276.
	c.	$35,138.
	d.	$140,552.

2.4 points   

QUESTION 20

1. Exhibit 15-5

On January 1, 2016, Roberts Company adopts a compensatory share option plan and grants 40 executives 1,000 shares each at $30 a share. The fair value per option is $7 on the grant date. The company estimates that its annual employee turnover rate during the service period of three years will be 4%.

​

Refer to Exhibit 15-5. The journal entry to record compensation expense for 2016 will be (Round your final answer to the nearest whole dollar.)

	a.	Compensation Expense                 247,726 Paid-in Capital Share Options                       247,726
	b.	Compensation Expense                  91,467 Paid-in Capital Share Options                        91,467
	c.	Compensation Expense                  93,333 Common Stock Option Plan                           93,333
	d.	Compensation Expense                   82,575 Paid-in Capital Share Options                         82,575

2.4 points   

QUESTION 21

1. Exhibit 15-5

On January 1, 2016, Roberts Company adopts a compensatory share option plan and grants 40 executives 1,000 shares each at $30 a share. The fair value per option is $7 on the grant date. The company estimates that its annual employee turnover rate during the service period of three years will be 4%.

​

Refer to Exhibit 15-5. At the end of 2017, the company estimates that the employee turnover will be 5% a year for the entire service period. At the end of 2018, only 30,000 options vest as only 30 of the 40 executives actually remain. The compensation expense for 2018 will be (Round off turnover calculations to three decimal places and answer to the nearest dollar.)

	a.	$80,022
	b.	$82,575
	c.	$49,957
	d.	$70,000

2.4 points   

QUESTION 22

1. Under the fair value method, if an executive does not exercise a stock option and it is allowed to lapse, the account – Paid-in Capital Share Options – is debited. What account is credited?

	a.	Gain from Expired Share Options
	b.	Deferred Compensation
	c.	Compensation Expense
	d.	Additional Paid-In Capital from Expired Share Options

2.4 points   

QUESTION 23

1. For a compensatory share option plan, a formal journal entry or entries would be required for which of the following dates?

	Issuance of Share
	Options on the	Issuance of Stock on
	Grant Date	the Exercise Date
I.	Yes	Yes
II.	Yes	No
III.	No	No
IV.	No	Yes

• ​

	a.	I
	b.	II
	c.	III
	d.	IV

2.4 points   

QUESTION 24

1. Which of the following types of corporations is owned or operated by a government unit?

	a.	private
	b.	domestic
	c.	closed
	d.	public

2.4 points   

QUESTION 25

1. Assume common stock is issued to employees as a result of exercising stock purchase rights issued under a noncompensatory share purchase plan. At what value does the company record that stock in its books?

	a.	market price of the stock
	b.	exercise price of the stock
	c.	market price of the stock at the first date that the stock purchase right can be exercised
	d.	option price of the stock plus the value assigned to the stock purchase right