I have Three multiply choice Questions : 1- Warren Co. recorded a right-of-use a

Question

I have Three multiply choice Questions :

1- Warren Co. recorded a right-of-use asset of $800,000 in a 10-year Type A lease. The interest rate charged by the lessor was 8%. Under the new ASU, the balance in the right-of-use asset after two years will be:

A- $648,000.

B- $640,000.

C- $804,000.

D- $968,000.

2- Refer to the following lease amortization schedule. The 10 payments are made annually starting with the inception of the lease. Title does not transfer to the lessee and there is no bargain purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable.

What would the lessee record as annual depreciation on the asset using the straight-line method?

A- $5,328.

B- $6,328.

C- $6,392.

D- $10,000.

3- XYZ Company leased equipment to West Corporation under a lease agreement that qualifies as a capital lease to West but not as a result of a bargain purchase option or a title transfer. The present value of the asset is $600,000. The expected economic life of the asset is 10 years. The lease term is five years. Using the straight-line method, what would West record as annual depreciation?

A- $120,000.

B- $61,000.

C- $60,000.

D- $0.

Payment Cash
Payment Effective
Interest Decrease
in balance
Balance 63,282 1 10,000 10,000 53,282 2 10,000 6,394 3,606 49,676 3 10,000 5,961 4,039 45,638 4 10,000 5,477 4,523 41,114 5 10,000 4,934 5,066 36,048 6 10,000 4,326 5,674 30,373 7 10,000 3,645 6,355 24,018 8 10,000 2,882 7,118 16,901 9 10,000 ? ? ? 10 10,000 ? ? ?

Explanation / Answer

Part 1)

$640,000 (which is Option B)

________

Explanation:

The lessee will depreciate its right-of-use-asset as per straight line method. The annual depreciation will be $80,000 (800,000/10). The total amount of depreciation for 2 years will be $160,000 (2*80,000). The balance in the right-of-use asset after two years is calculated as follows:

Balance after 2 Years = 800,000 - 160,000 = $640,000

________

Part 2)

$6,328 (which is Option B)

________

Explanation:

We will depreciate the opening balance in the lease account with the use of straight line method. The amount will be depreciated over the period of the lease and not for the economic life of the asset. The annual depreciation is calculated as follows:

Annual Depreciation = Opening Lease Balance/Lease Period = 63,282/10 = $6,328

________

Part 3)

$120,000 (which is Option A)

________

Explanation:

We will depreciate the present value of the lease account with the use of straight line method. The amount will be depreciated over the period of the lease and not for the economic life of the assets. The annual depreciation is calculated as follows:

Annual Depreciation = Present Value/Lease Period = 600,000/5 = $120,000

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