Danville Corporation buys a truck for $52,000 and leases it to Viceroy for 8 yea
ID: 2416694 • Letter: D
Question
Danville Corporation buys a truck for $52,000 and leases it to Viceroy for 8 years. At the end of that time, Viceroy can buy the truck for $7,000 in cash. Which of the following is not true? a. If this purchase option is viewed as a bargain, Danville should record the $7,000 as a future cash flow in accounting for the lease even though it is not guaranteed. b. Unless the purchase option is viewed as a bargain, Danville cannot account for this lease as a capital lease. c. The purchase option cannot be viewed as a bargain unless it is significantly below the expected fair value of the truck on that date. d. If this purchase option is viewed as a bargain, Danville’s profit to be recognized in the first year will be increased.
On January 1, Year One, Green Company leases a machine for four years. Because Green is a relatively new business and is struggling with its cash flows, the lessor sets the payments as $10,000 per year for the first two years and $20,000 for the last two years. These payments were computed based on an implicit interest rate of 10 percent per year. The contract does not meet any of the four criteria to be reported as a capital lease. What amount of expense should Green recognize in Year Two?
a.$5,000
b.$6,000
c.$10,000
d.$15,000
Explanation / Answer
For Danville Corporation, unless the purchase option is viewed as a bargain, the lease cannot be accounted for as a capital lease is an incorrect statement.
Expense to be recognised by Green in year two will be $ 10,000 only, equivalent to the lease payment made during that year, since none of the criteria for reporting this lease as a capital lease are met.
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