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ACC 422 Week 5 CPA Solutions



ACC 422 Week 5 CPA Solutions Conn Company purchased a new machine for $480,000 on January 1, year 1, and leased it to East the same day. The machine has an estimated 12-year life, and will be depreciated $40,000 per year. The lease is for a 3-year period expiring January 1, year 4, at an annual rental of $85,000. Additionally, East paid $30,000 to Conn as a lease bonus to obtain the 3-year lease. For year 1 Conn incurred insurance expense of $8,000 for the leased machine. What is Conn’s year 1 operating profit on this leased asset? $67,000 $55,000 $47,000 $37,000 Bain Co. entered into a 10-year lease agreement for a new piece of equipment worth $500,000. At the end of the lease, Bain will have the option to purchase the equipment. Which of the following would require the lease to be accounted for as a capital lease? The lease includes an option to purchase stock in the company. The estimated useful life of the leased asset is 12 years. The present value of the minimum lease payments is $400,000. The purchase option at the end of the lease is at fair market value. Melville Company leased equipment from Rice Corporation on July 1, year 1, for an 8-year period expiring June 30, year 9. Equal payments under the lease are $600,000 and are due on July 1 of each year. The first payment was made on July 1, year 1. The rate of interest contemplated by Melville and Rice is 10%. The cash selling price of the equipment is $3,520,000 and the cost of the equipment on Rice’s accounting records is $2,800,000. Assuming that the lease is appropriately recorded as a sales-type lease, what is the amount of profit on the sale and interest income that Rice should record for the year ended December 31, year 1? $0 and $0. $0 and $146,000. $720,000 and $146,000. $720,000 and $160,000. On January 1, year 1, Frost Co. entered into a two-year lease agreement with Ananz Co. to lease 10 new computers. The lease term begins on January 1, year 1 and ends on December 31, year 2. The lease agreement requires Frost to pay Ananz two annual lease payments of $8,000. The present value of the minimum lease payments is $13,000. Which of the following circumstances would require Frost to classify and account for the arrangement as a capital lease? The economic life of the computers is three years. The fair value of the computers on January 1, year 1, is $14,000. Frost Co. does not have the option of purchasing the computers at the end of the lease term. Ownership of the computers remains with Ananz Co. throughout the lease term and after the lease ends. On January 1, year 1, Hooks Oil Co. sold equipment with a carrying amount of $100,000, and a remaining useful life of 10 years, to Maco Drilling for $150,000. Hooks immediately leased the equipment back under a 10-year capital lease with a present value of $150,000 and will depreciate the equipment using the straight-line method. Hooks made the first annual lease payment of $24,412 in December year 1. In Hooks’ December 31, year 1 balance sheet, the unearned gain on equipment sale should be $50,000 $45,000 $25,588 $0 Beal, Inc. intends to lease a machine from Paul Corp. Beal’s incremental borrowing rate is 14%. The prime rate of interest is 8%. Paul’s implicit rate in the lease is 10%, which is known to Beal. Beal computes the present value of the minimum lease payments using 8% 10% 12% 14% On 1/31/Y1, Clay Company leased a new machine from Saxe Corp. The following data relate to the lease transaction at its inception: Lease term 10 years Annual rental payable at beginning of each lease year $50,000 Useful life of machine 15 years Implicit interest rate 10% Present value of an annuity of 1 in advance for 10 periods at 10% 6.76 Present value of annuity of 1 in arrears for 10 periods at 10% 6.15 Fair value of the


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