CPA Practice Test 15
10 free CPA practice questions in the real exam format, covering the official content areas, with an explanation for every answer.
Question 1 of 10
Select TransactionsClient Records — Delmont Freight Co.
From: Theo Lindqvist, Assistant Controller To: Staff Accountant Date: January 9, Year 1 Subject: Yard-tractor lease
We signed the attached lease for three yard tractors, and it commenced January 1, Year 1. Please compute the initial lease liability and right-of-use asset so I can record the commencement entries. Delmont is the lessee and reports under U.S. GAAP.
Lease abstract — Summit Equipment Leasing (lessor) and Delmont Freight Co. (lessee)
1Commencement date: January 1, Year 1. Lease term: 5 years, noncancelable. Economic life of the tractors: 8 years. Fair value at commencement: $260,000.
2Fixed lease payments: $40,000 per year, due each January 1, the first paid on the commencement date.
3Variable payments: $8 per operating hour above 2,000 hours per year.
4Residual value guarantee: Delmont guarantees that the tractors will be worth at least $30,000 at the end of the term. Delmont expects them to be worth $34,000.
5Purchase option at the end of the term for $70,000. Delmont is not reasonably certain to exercise it.
6At commencement, Summit paid Delmont a $3,000 lease incentive. Delmont paid a broker a $5,000 commission that it would not have incurred had the lease not been signed.
7Delmont separately contracts with Lowell Fleet Services for maintenance at $2,500 per year.
8The rate implicit in the lease is not readily determinable. Delmont's incremental borrowing rate is 6%.
| Factor | Periods | Value |
|---|---|---|
| PV of $1 | 5 | 0.747 |
| PV of an ordinary annuity of $1 | 4 | 3.465 |
| PV of an ordinary annuity of $1 | 5 | 4.212 |
| PV of an annuity due of $1 | 5 | 4.465 |
Summary of selected guidance (paraphrased)
ASC 842-20-30-1: At commencement, the lessee measures the lease liability at the present value of the lease payments not yet paid, discounted at the rate implicit in the lease or, if that rate is not readily determinable, the lessee's incremental borrowing rate.
ASC 842-10-30-5: Lease payments include fixed payments (less incentives receivable), variable payments that depend on an index or rate, the exercise price of a purchase option the lessee is reasonably certain to exercise, and amounts probable of being owed under residual value guarantees. Variable payments based on usage are excluded.
ASC 842-20-30-5: The right-of-use asset equals the initial lease liability, plus lease payments made at or before commencement, less lease incentives received, plus initial direct costs.
ASC 842-10-30-9: Initial direct costs are incremental costs of a lease that would not have been incurred had the lease not been obtained.
Cell 1 — Lease liability: enter the lease liability Delmont should report on January 1, Year 1, immediately after the first lease payment.