Sunrise Leasing Company signs an agreement on January 1, 2016

$19.00

Description

  1. Sunrise Leasing Company signs an agreement on January 1, 2016, to lease equipment to ABC Company. The term of the noncancelable lease is 5 years with no renewal option. The equipment has an estimated economic life of 6 years. The cost of the asset to the lessor is $400,000. The fair value of the asset at January 1, 2016, is $400,000. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $80,000, none of which is guaranteed. The agreement requires equal annual rental payments, beginning on January 1, 2016. Collectibility of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor. Assume the lessor desires an 8% rate of return on its investment, the amount of the annual rental payment should be:

    $75,000

    $79,777

    $80,135

    $88,374

2 points

QUESTION 2

  1. Rice Inc. acquired 30% of the outstanding common stock of XYZ Inc. on December 31, 2015, which allows Rice to exercise significant influence over XYZ. The purchase price was $900,000 for 30,000 shares. XYZ Inc. declared and paid a $0.60 per share cash dividend on June 30 and on December 31, 2016. XYZ reported net income of $400,000 for 2016. The fair value of XYZ’s stock was $40 per share at December 31, 2016. At what amount is the equity investment reported on the balance sheet at December 31, 2016 and what is the total revenue (or income) reported in 2016 income statement?

    Equity Investment: $900,000; Investment Revenues: $120,000

    Equity Investment: $1,200,000; Investment Revenues: $36,000

    Equity Investment: $1,200,000; Investment Revenues: $120,000

    Equity Investment: $984,000; Investment Revenues: $120,000

2 points

QUESTION 3

  1. At the end of 2015, Spring Co. held trading securities that cost $90,000 and had a year-end market value of $92,000. During 2016, all of these securities were sold for $85,000. At the end of 2016, Spring had acquired additional trading securities that cost $50,000 and had a year-end market value of $46,000. What is the impact of these stock activities on Spring’s 2016 income statement?

    Loss of $11,000.

    Loss of $5,000.

    Loss of $4,000.

    Gain of $1,000.

2 points

QUESTION 4

  1. On January 1, 2016, Lan Company purchases land having a fair value of $272,232 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of $400,000. The amount of interest expense recognized for year 2016 would be:

    $21,779

    $80,000.

    $100,575.

    $200,000.

2 points

QUESTION 5

  1. Revolution Leasing Corp. leases farm equipment to its customers under direct-financing leases. Typically the equipment has no residual value at the end of leases and the contracts call for payments at the beginning of each year. Revolution’s target rate of return is 8%. On a five-year lease of equipment with a fair value of $431,213, Revolution will earn interest revenue over the life of the lease of:

    0.

    $98,845.

    $89,888.

    $68,787.

2 points

QUESTION 6

  1. The following information pertains to Lee Corp.’s available-for-sale securities:

    December 31

    2015

    2016

    Cost

    $200,000

    $200,000

    Fair value

    220,000

    170,000

    Differences between cost and fair values are considered to be temporary. The decline in fair value was properly accounted for at December 31, 2015. Ignoring tax effects, by what amount should other comprehensive income (OCI) be debited at December 31, 2016?

    $60,000

    $50,000.

    $30,000.

    $0.

2 points

QUESTION 7

  1. On January 1, 2016, Oliver’s Restaurants sells a computer system to Quick Finance Co. for $500,000 and immediately leases the computer system back. The computer was carried on Oliver’s books at a value of $400,000. The term of the noncancelable lease is 10 years; title will transfer to Oliver. The lease agreement requires equal rental payments of $74,514.76 at the end of each year. The incremental borrowing rate for Oliver is 10%. Oliver is aware that Quick Finance Co. set the annual rental to insure a rate of return of 8%. The computer has a fair value of $500,000 on January 1, 2016, and an estimated economic life of 10 years. In Oliver’s December 31, 2016 balance sheet, the deferred profit from the sale of this computer system would be:

    $100,000.

    $90,000.

    $80,000.

    $0.

2 points

QUESTION 8

  1. Incredible Company, a machinery dealer, leased a machine to Spring Corporation on January 1, 2016. The lease is for a 10-year period and requires equal annual payments of $20,000 at the beginning of each year. The machine has an unguaranteed residual value of $5,000 at the end of lease term. The first payment is received on January 1, 2016. Incredible had purchased the machine during 2015 for $120,000. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by Incredible. Incredible set the annual rental to ensure a 10% rate of return. The machine has an economic life of 12 years and reverts to Incredible at the termination of the lease. The amount to record lease receivable on January 1, 2016 (before the first payment) would be:

    $111,543.

    $121,800.

    $137,108.

    $145,855.

2 points

QUESTION 9

  1. On May 1, 2016, Wolf Company issued $300,000 of 8%, 10-year bonds dated January 1 at par plus accrued interest. Interest is payable semiannually on July 1 and January 1. How much cash would Wolf receive on issuance date?

    $308,000.

    $304,000.

    $300,000.

    $292,000.

2 points

QUESTION 10

  1. Harvest Company sold $2,000,000 of 6%, 10-year bonds at 95 on January 1, 2016. The bonds were dated January 1, 2016 and pay interest on July 1and January 1. If Harvest uses the straight-line method to amortize bond premium or discount, the balance of discount on bonds payable on December 31, 2018 should be:

    $80,000.

    $75,000.

    $70,000.

    $60,000.

2 points

QUESTION 11

  1. On December 31, 2015, the Sunrise Bank enters into a debt restructuring agreement with Butterfly Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $2,000,000 note receivable by the following modifications: 1) Reducing the principal obligation from $2,000,000 to $1,200,000; 2) Extending the maturity date from December 31, 2015, to January 1, 2019; 3) Reducing the interest rate from 12% to 10%. Butterfly pays interest at the end of each year. On January 1, 2019, Butterfly Company pays $1,200,000 in cash to Sunrise Bank. The amount of loss from troubled-debt restructuring recorded by Sunrise on December 31, 2015 would be:

    $454,365

    $689,400.

    $857,644.

    $925,411.

2 points

QUESTION 12

  1. ABC Corporation issued $600,000 of 8%, 10-year bonds on January 1, 2016, for $689,267. This price provided a yield of 6% on the bonds. Interest is payable semiannually on January 1 and July 1. If ABC uses the effective-interest method, the amount of interest expense to record if financial statements are issued on December 31, 2016 should be:

    $40,124.

    $41,256.

    $48,000.

    $49,743.

2 points

QUESTION 13

  1. Dragonfly Co. leased equipment to ABC Co. on July 1, 2016, and properly recorded the sales-type lease at $67,864, the present value of the lease payments discounted at 5%. The first of eight annual lease payments of $10,000 due at the beginning of each year of the lease term was received and recorded on July 3, 2016. Dragonfly had purchased the equipment for $65,311. What amount related to the lease contract that Dragonfly will report in 2016 income statement?

    $4,000.

    $3,000.

    $2,000.

    $0.

2 points

QUESTION 14

  1. On January 1, 2016, Autumn Corp. leased equipment under a capital lease. Annual lease payments of $10,000 are due at the beginning of year for 10 years. The equipment’s useful life is 10 years, and the interest rate implicit in the lease is 8%. The capital lease obligation was recorded on January 1, 2016 at $72,469, and the first lease payment was made on that date. What amount should Autumn include in current liabilities for this capital lease in its December 31, 2016 balance sheet?

    $4,763.

    $5,002.

    $6,892.

    $57,467.

2 points

QUESTION 15

  1. Silver Company is building a new office building at a cost of $1,200,000. It received a down payment of $400,000 from local business to support the project, and now needs to borrow $800,000 to complete the project. It therefore decides to issue $800,000 of 8%, 10-year bonds for $748,658. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 9%. Silver paid $6,000 in bond issue costs related to the bond sale. Assume that on April 1, 2017, Silver Company redeems all of the bonds at a cost of $780,000 plus accrued interest. The amount of loss on redemption of bonds will be:

    $23,620.

    $25,345.

    $28,835.

    $32,292.

2 points

QUESTION 16

  1. On January 1, 2016, XYZ Furniture Co. borrowed $2,000,000 (face value) from Rainbow Co., a major customer, through a zero-interest-bearing note due in 8 years. Because the note was zero-interest-bearing, XYZ Furniture agreed to sell furniture to this customer at lower than market price. An 8% rate of interest is normally charged on this type of loan. The amount of interest expense reported for 2016 income statement should be:

    $101,423.

    $86,443.

    $75,674.

    $66,983.

2 points

QUESTION 17

  1. Seashell Company manufactures a check-in kiosk with an estimated economic life of 8 years and leases it to Northeast Airlines for a period of 6 years. The normal selling price of the equipment is $436,816, and its unguaranteed residual value at the end of the lease term is estimated to be $10,000. Northeast will pay annual payments of $90,000 at the beginning of each year and all maintenance, insurance, and taxes. Seashell incurred costs of $400,000 in manufacturing the equipment and $6,000 in negotiating and closing the lease. Seashell has determined that the collectibility of the lease payments is reasonably predictable, that no additional costs will be incurred, and that the implicit interest rate is 10%. How much should Seashell report as lease receivable (before first payment) and recognize as sales revenue?

    Lease Receivable: $400,000; Sales Revenue: $436,816

    Lease Receivable: $436,816; Sales Revenue: $400,000

    Lease Receivable: $436,816; Sales Revenue: $431,171

    Lease Receivable: $431,171; Sales Revenue: $400,000

2 points

QUESTION 18

  1. The following information pertains to Spring Corp.’s issuance of bonds on January 1, 2016:

    Face amount $600,000

    Term 20 years

    Stated interest rate 10%

    Interest payment dates semiannually on July 1 and January 1

    Yield 12%

    5%

    6%

    10%

    12%

    Present value of $1 for 20 periods

    0.38

    0.31

    0.15

    0.10

    Present value of $1 for 40 periods

    0.14

    0.10

    0.02

    0.01

    Present value of ordinary annuity of $1 for 20 periods

    12.46

    11.47

    8.51

    7.47

    Present value of ordinary annuity of $1 for 40 periods

    17.16

    15.05

    9.78

    8.24

    What should the issue price be for each $1,000 bond?

    $1,000.

    $943.

    $853.

    $802.

2 points

QUESTION 19

  1. The following information was extracted from Victor Co.’s December 31 balance sheet:

    Noncurrent assets:

    Available-for-sale securities (carried at fair value)

    $80,000

    Equity:

    Accumulated other comprehensive income (OCI)

    Unrealized gains and losses on available-for-sale securities

    (5,000)

    Historical cost of the available-for-sale securities was

    $85,000.

    $80,000.

    $90,000.

    $95,000.

2 points

QUESTION 20

  1. On December 31, 2015, the Sunrise Bank enters into a debt restructuring agreement with Butterfly Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $2,000,000 note receivable by the following modifications: 1) Reducing the principal obligation from $2,000,000 to $1,200,000; 2) Extending the maturity date from December 31, 2015, to January 1, 2019; 3) Reducing the interest rate from 12% to 10%. Butterfly pays interest at the end of each year. On January 1, 2019, Butterfly Company pays $1,200,000 in cash to Sunrise Bank. The amount of gain from troubled-debt restructuring recorded by Butterfly on December 31, 2015 would be:

    $0

    $110,000.

    $330,000.

    $440,000.

Reviews

There are no reviews yet.

Be the first to review “Sunrise Leasing Company signs an agreement on January 1, 2016”

Your email address will not be published. Required fields are marked *