CPA / CMA REVIEW QUESTIONS

CPA Exam Questions

 

1. b. The 4 year lease term is greater than 75% of the asset's 5 year life making this a capital lease.

2. b. $111,500

 

Present value at 1/1/09 $112,500

Payment made 12/30/09 $10,000

Interest portion for 2009 (8% × $112,500) (9,000)

Portion applied to the liability (1,000)

Capital lease liability 12/31/09 $111,500

3. a. The key point is to first calculate the annual payments required by the lease. Use the basic present value formula: Annual Payments × Present Value Factor = Present Value of Future Payments. Therefore: Annual Payments × 4.313 = $323,400; Annual payments = $323,400/4.313; Annual payments = $75,000. Then multiply the customer's $75,000 annual payment by 5 years for a total of $375,000. This figure represents Glade Co.'s gross Lease Receivable. The difference between the gross Lease Receivable and the present value of the future payments is the total amount of Interest Revenue that will be earned over the life of the lease ($375,000 - $323,400 = $51,600).

4. c. The profit on the sale is the difference between the cash selling price and the book value, $3,520,000 - $2,800,000 = $720,000. The interest is computed as follows:

Present value of minimum lease payments  

    and lease obligation, 7/1/09 $3,520,000

Initial payment made 7/1/09 (600,000)

Liability balance $2,920,000

Interest rate 10% = $292,000

For one-half year = $146,000

CPA Exam Questions (concluded)

5. a. The guaranteed residual value is a promise made by the lessee that the lessor can sell the leased asset at the end of the lease for a guaranteed amount. Since this promise is a potential future payment, it must be included in the calculation of the present value of the lessee's future lease payments.

6. a. In a capital lease with a bargain purchase option, the lessee will control the asset for its total useful life. Therefore, the depreciation should be allocated over the 8-year life of the asset. $240,000 cost - 20,000 salvage value = 220,000 / 8 years = $27,500 per year.

7. a. The capitalized lease liability should be the annual lease payments less the executory cost (real estate taxes) times the present value factor for an ordinary annuity of 1 for nine years at 9%. The calculation would be: ($52,000 - 2,000) × 6.0 = $300,000. The real estate taxes are a period cost and should be charged to expense.

8. a. Since the machine is being leased back for a minor part (present value of rentals is less than 10% of the value of the property at the date of the sale-leaseback), the sale and the lease are viewed separately and the entire $30,000 profit is recognized.

 

CMA Exam Questions

  1. d. For both sales-type and direct-financing leases, the lessor’s gross investment in the lease is the amount of the minimum lease payments (which include periodic payments plus guaranteed residual value) plus any amounts of unguaranteed residual value. The net investment in the lease is equal to the gross investment, plus any unamortized initial direct costs, minus unearned income. The unguaranteed residual value is the expected value of the leased asset in excess of the guaranteed residual value at the end of the lease term (SFAS 13).
  2. b. SFAS 91 defines initial direct costs as having two components: (1) the lessor’s external costs to originate a lease incurred in dealings with independent third parties and (2) the internal costs directly related to specified activities performed by the lessor for that lease. According to SFAS 13, in a sales-type lease, the cost, or carrying amount if different, plus any initial direct costs, minus the present value of any unguaranteed residual value, is charged against income in the same period that the present value of the minimum lease payments is credited to sales. The result is the recognition of a net profit or loss on the sales-type lease.

  3. d. A lessee records a lease as a capital lease if it meets any one of four criteria. Existence of a bargain purchase option is one of these criteria. If a lease involving land and a building contains a bargain purchase option or if the lease transfers ownership to the lessee at the end of its term, the lessee separately capitalizes the land and the building.