Quiz 3 Mock
Multiple C hoice
Identify the choice that best completes the statement or answers the question. ____
1. All of the following are the general principles underlying the valuation of liabilities e xcept: a. Liabilities requiring future cash payments appear at the present value of the required future cash flows discounted at an interest rate that reflects the uncertainty that the firm will be able to make the cash payments.
b. The fair value of a liability cannot differ from the amount appearing on the balance sheet, particularly for long-term debt.
c. Liabilities representing cash advances from customers appear at the amount of the cash advance.
d. Liabilities requiring the future delivery of goods or services appear at the estimated cost of those goods and services.
3. Under U.S. GAAP, which of the following items would require a lessee to classify a lease of equipment as a capital lease?
of the following are typically recognized as accounting liabilities e xcept: Notes Payable
Subscription Fees Received in Advance
There is no transfer of ownership to the lessee at the end of the lease term. The lease does not contain a bargain purchase option.
The lease term is 90% of the estimated economic life of the lease property. The present value of the contractual minimum lease payments is 75% of the fair value of the leased property.
4. Which of the following is n ot a condition that requires capital lease accounting? a. The lease term extends for more than 70% of the assets economic life. b. The lease agreement transfers ownership of the leased asset to the lessee. c. The lease agreement contains a bargain purchase option.
d. The present value of the minimum lease payments equals or exceeds 90% of the fair market value of the asset.
NOTE: The following multiple choice questions require present value information. On January 1, 2012, Porter Corporation signed a five-year noncancelable lease for certain machinery. The terms of the lease called for:
Price to make annual payments of $60,000 at the end of each year (starting on Dec. 31, 2012) for five years. Porter must return the equipment to the lessor end of this period.
The machinery has an estimated useful life of 6 years and no expected salvage value.
Porter uses the straight-line method of depreciation for all of its fixed assets. Porter’s incremental borrowing rate is 8%.
The fair value of the asset at January 1, 2012 is $275,000.
5. Under which of the following conditions does the equipment lease qualify for capital lease accounting? a. The lease does n ot contain a bargain purchase option.
b. The lease term is equal to or greater than 75% of the asset’s economic life. c. The lease term is equal to or greater than 90% of the asset’s economic life. d. The lease does n ot transfer ownership to the lessee at the end of the lease term.
6. For the year ended December 31, 2012, Porter should record depreciation expense for the leased equipment equal to
Santa C orporation
NOTE: These multiple choice questions require present value information. Santa Corporation manufactures Christmas decorations and supplies throughout the world. The company owns property, plant, and equipment and also enters into operating leases for certain facilities. Assume that Santa’s incremental borrowing rate is 8%. The company's tax rate is 40%. Listed below is selected financial data for Santa and a portion of the company's operating lease footnote. 2012
Property, Plant, & Equipment (net)
Common Shareholders’ Equity
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