1.

Mack Corporation (the lessee) leased equipment from Kandie Corp. (the lessor) on July 1,
Year One, for an eight-year period. Kandie normally manufacturers this equipment for
$800,000 and sells it for $1.1 million but decided to lease the item this time for $1.6
million. The lease is for 8 years, the same as the life of the equipment. Annual payments
under the lease are $200,000 and are due on July 1 of each year. The first payment was
made on July 1, Year One. Payments were set to earn an annual interest rate for the lessor
of 10 percent. What is the amount of income that Kandie should record for the year ended
December 31, Year One?
A $345,000
B $355,000
C $380,000
D $390,000

2.

The Ace Company buys cars and sells them at 20 percent above cost. On January 1, Year
One, the company buys a car for $40,000 and immediately leases it for its entire six year
life. Assume that annual payments for this lease will be $10,000 per year starting on
January 1, Year One. This payment amount was based on an implicit interest rate of 10
percent. How much interest revenue will Ace recognize for Year One?
A $3,000
B $3,800
C $4,000
D $4,800

3.

The Richmond Car Company buys cars and then sells them at 20 percent above that cost.
On January 1, Year One, the company buys a car for $40,000 and leases it to a customer
for six annual payments of $10,000 each. For convenience, assume that this amount
includes interest at exactly 10 percent per year. The car is expected to have a life of six
years with no residual value. The first payment is made immediately. What is the Year One
increase in income for Richmond Car Company as a result of this lease contract?
A $10,000
B $11,200
C $11,800
D $12,600

4.

On December 31, Year One, the Reinhardt Company owns a tractor and leases it to the
Smith Company. The tractor has a life of five years but the lease is only for four years.
Which of the following statements is NOT true for the Reinhardt Company?
A If this is a sales-type lease, profit will be recognized immediately with interest revenue
then recognized over the next four years.
B If this is a direct financing lease, no profit is recognized immediately but interest
revenue is recognized over the next four years.
C Based on the information, this might be an operating lease or it might be a capital
lease.
D Reinhardt must base the computation of interest revenue on the imputed interest rate
built into the contract.

5.

Jones buys widgets and marks them up 20 percent and sells them. On January 1, Year
One, Jones buys a widget for $30,000 but this time Jones leases the item to another
company for its entire 10 year life. Jones sets the annual payments (which begin

immediately) at $5,300 in order to earn an annual interest rate of 10 percent. How much
will net income increase for Jones during Year One because of this lease?

A $2,470
B $3,000
C $6,000
D $9,070