7/25/2019 ACC 305 QUIZ 4

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ACC 305 QUIZ 4

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1. When a company sells property and then leases it back, any gain on the sale should usually be

2. The initial direct costs of leasing

3. On January 1, 2015, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a

storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably

predictable and no important uncertainties surround the amount of costs yet to be incurred by thelessor. The following information pertains to this lease agreement.

(a) The agreement requires equal rental payments at the beginning each year.

(b) The fair value of the building on January 1, 2015 is $4,000,000; however, the book value to Holt

is $3,300,000.

(c) The building has an estimated economic life of 10 years, with no residual value. Yancey

depreciates similar buildings on the straight-line method.

(d) At the termination of the lease, the title to the building will be transferred to the lessee.

(e) Yanceys incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rentalto insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc.

(f) The yearly rental payment includes $10,000 of executory costs related to taxes on the property.

Future Value of Ordinary Annuity of 1

Period 5% 6% 8%

10% 12%

1 1.000001.000001.000001.000001.00000

2 2.050002.060002.080002.100002.12000

3 3.152503.183603.246403.310003.37440

4 4.310134.374624.506114.641004.77933

5 5.525635.637095.866606.105106.35285

6 6.801916.975327.335927.715618.11519

7 8.142018.393848.922809.4871710.08901

8 9.549119.8974710.636611.4358912.29969

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7/25/2019 ACC 305 QUIZ 4

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3

9 11.0265

6

11.4913

2

12.4875

6

13.5794814.77566

10 12.5778

9

13.1807

9

14.4865

6

15.9374317.54874

Present Value of an Annuity Due of 1

Period 5% 6% 8% 10% 12%

11.00000

1.00000

1.00000

1.00000

1.00000

21.95238

1.94340

1.92593

1.90909

1.89286

32.85941

2.83339

2.78326

2.73554

2.69005

43.72325

3.67301

3.57710

3.48685

3.40183

54.54595

4.46511

4.31213

4.16986

4.03735

65.32948

5.21236

4.99271

4.79079

4.60478

76.07569

5.91732

5.62288

5.35526

5.11141

8 6.786376.582386.206375.868425.56376

97.46321

7.20979

6.74664

6.33493

5.96764

108.10782

7.80169

7.24689

6.75902

6.32825

What is the amount of the minimum annual lease payment? (Rounded to the nearest dollar.)

4. In computing depreciation of a leased asset, the lessee should subtract

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5. Major reasons why a company may become involved in leasing to other companies is (are)

6. Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2015 for the

purpose of leasing a machine to be used in its manufacturing operations. The following data pertain

to the agreement:

(a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $287,432

are due on January 1 of each year.

(b) The fair value of the machine on January 1, 2015, is $800,000. The machine has a remaining

economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the

termination of the lease.

(c) Alt depreciates all machinery it owns on a straight-line basis.

(d) Alts incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit

rate used by Yates.

(e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which

is sufficiently material to make collectibility of future lease payments doubtful.

Future Value of Ordinary Annuity of 1

Period 5% 6% 8%

10% 12%

1 1.000001.000001.000001.000001.00000

2 2.050002.060002.080002.100002.12000

3 3.152503.183603.246403.310003.37440

4 4.310134.374624.506114.641004.77933

5 5.525635.637095.866606.105106.35285

6 6.801916.975327.335927.715618.11519

7 8.142018.393848.922809.4871710.08901

8 9.549119.8974710.6366

3

11.4358912.29969

9 11.0265

6

11.4913

2

12.4875

6

13.5794814.77566

10 12.5778

9

13.1807

9

14.4865

6

15.9374317.54874

Present Value of an Annuity Due of 1

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Period 5%

6%

8%

10%

12%

11.000001.000001.000001.000001.00000

21.952381.943401.925931.909091.89286

32.859412.833392.783262.735542.69005

43.723253.673013.577103.486853.40183

54.545954.465114.312134.169864.03735

65.329485.212364.992714.790794.60478

76.075695.917325.622885.355265.11141

86.786376.582386.206375.868425.56376

97.463217.209796.746646.334935.96764

10

8.107827.801697.246896.759026.32825

1.