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Which of the following is true? a. In an operating lease, theleased asset and the lease liability must be reported in thebalance sheet. Therefore, no expense is recognized in the incomestatement.
b. In a capital lease, the leased asset and the lease liabilitymust be reported in the balance sheet. Therefore, no expense isrecognized in the income statement.
c. Although the total expense recorded over the lease period is thesame for both types of leases, there are differences in the expenserecorded in each period.
d. The total expense recorded in each year is the same for bothtypes of leases.'

why the answer is C?

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Hubert Koch
Hubert KochLv2
28 Sep 2019

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Analyzing and Interpreting Footnote on Operating and Capital Leases

Assume Verizon Communications, Inc., provides the following footnote relating to its leasing activities in its 10-K report. The aggregate minimum rental commitments under noncancelable leases for the periods shown at December 31, 2010, are as follows:

Years (dollars in millions) Capital Leases Operating Leases
2011 $ 83 $ 1,449
2012 71 1,316
2013 67 1,056
2014 63 806
2015 46 527
Thereafter 161 1,937
Total minimum rental commitments 491 $ 7,091
Less interest and executory costs (89)
Present value of minimum lease payments 402
Less current installments (46)
Long-term obligation at December 31, 2010 $ 356


(a) Confirm that the implicit discount rate for Verizon's capital leases is 5.01%.

N 0 1 2 3 4 5 6 7 8 9
Amount Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer
IRR Answer %


(b) What effect does the failure to capitalize operating leases have on Verizon's balance sheet? Over the life of its leases, what effect does this lease classification have on net income?

There is no effect on the balance sheet and income statement as a result of the classification of leases.

Total assets and total liabilities are higher than if the operating lease had been classified as a capital lease. Over the lease term, total rent expense under operating leases will be equal to the interest and depreciation expense that the company would record under capital leases.

Total assets and total liabilities are lower than if the operating lease had been classified as a capital lease. Over the lease term, total rent expense under operating leases will be equal to the interest and depreciation expense that the company would record under capital leases.

Total assets and total liabilities are lower than if the operating lease had been classified as a capital lease. Over the lease term, total rent expense under operating leases will be greater than the interest and depreciation expense that the company would record under capital leases.

1.00 points out of 1.00



(c) Compute the present value of Verizon's operating leases, assuming an 5.01% discount rate and rounding the remaining lease term to 3 decimal places. (Use a financial calculator or Excel to compute. Do not round until your final answers. Round each answer to the nearest whole number.)

($ millions) Present Value
Year 1 Answer
Year 2 Answer
Year 3 Answer
Year 4 Answer
Year 5 Answer
After 5 Answer
Total* Answer

* (Use subsequent rounded answers for calculation.)


Which of the following statements best describes how we might use this additional information in our analysis of the company?

To assess the company's financial condition and performance, we might add the present value of its operating leases to both operating assets and nonoperating liabilities. No adjustment is necessary for the income statement.

To assess the company's financial condition and performance, we might add the sum of the contractual payments under the operating leases to both assets and nonoperating liabilities, and we can replace rent expense with the depreciation of the lease assets and the interest on the lease liability.

To assess the company's financial condition and performance, we might add the present value of its operating leases to both operating assets and nonoperating liabilities, and we can replace rent expense with the depreciation of the lease assets and the interest on the lease liability.

Verizon's balance sheet and income statement are prepared in accordance with GAAP. No adjustments are necessary to evaluate the financial condition of the company.

1.00 points out of 1.00

7. The future value of equal semi-annual payments of $500 at 8%compounded semiannually for 4 years is HINT: FV of Annuity of $1The solution to this problem requires time value of moneycalculations. Reference to Tables 9-1 through 9-4 in the text isnecessary to complete the calculations.

a. $ 868 b. $9,320 c. $2,000 d. $4,607

8. What is the correct classification of the account: Discounton Notes Payable?

a. a revenue b. a contra liability c. an asset d. an expense

9. If the annual interest is 12%, but the compounding is donequarterly, then the interest rate is 3% per period.

a. True b. False

10. A convertible bond is one where a. the issuer can convertfrom

a fixed interest rate to a floating one. b. the issuer canconvert it from long-term to short-term. c. the issuer can retirethe bond before its specified due date. d. the holder can convertthe bond into common stock at a future time.

11. Which of the following statements regarding serial bonds istrue?

a.They are likely to be issued by food companies.

b. They have shorter lives than term bonds.

c.They are strongly backed by the issuer's collateral.

d. The bonds do not all mature on the same date.

12. Bonds are a popular source of financing because

a.bond interest expense is deductible for tax purposes, whiledividends paid on stock are not.

b. financial analysts tend to downgrade a company that hasraised large amounts of cash by frequent issues of stock.

c. a company having cash flow problems can postpone payment ofinterest to bondholders.

d. the bondholders can always convert their bonds into stock ifthey choose.

13. When determining the amount of interest to be paid on abond, which of the following information is not necessary?

a.The face amount of the bonds

b. The selling price of the bonds

c.The face rate of interest on the bonds

d. The length of the interest period, annually or semiannually14. Which of the following statements is correct?

a.Bonds are issued at a price that reflects the stated rate ofinterest on the day the bond is purchased.

b. If the face rate of interest on a bond is not equal to themarket rate of interest, then the company desiring to issue thebonds must reprint its bond certificates.

c.The actual issue price of a bond represents the present valueof all future cash flows related to the bond.

d. The market rate of interest has no bearing on the sellingprice of the bonds.

15. Endeavor Company issued 20-year bonds with a coupon rate of6% when the market rate of interest was 9%. This means that thebonds were issued

a.at a premium. b. at a discount. c.at the face value. d. withan additional 3 years of interest.

16. Which of the following statements regarding leases isfalse?

a. Lease agreements are a popular form of financing the purchaseof assets because leases do not require a large initial outlay ofcash.

b. Accounting recognizes two types of leases--operating andcapital leases.

c. If a lessor classifies a lease as a capital lease, then thelessee records a lease liability on its balance sheet.

d. If a lease is classified as an operating lease, the lesseerecords a lease liability on its balance sheet.

17. Which of the following accounts would not appear on thebalance sheet of a lessee company recording a capital lease?

a. Accumulated depreciation on the leased asset

b. Lease obligation in the current liability section

c. Lease obligation in the long-term liability section

d. Rent expense on the income statement

On January 1, Year One, Owens buys a large warehouse for$700,000 which it immediately sells to National Financing for$800,000. The warehouse has an expected life of 10 years. Owensimmediately signs a contract to lease the warehouse back for itsown use. This lease is for 10 years with payments of $120,000 peryear. The first payment is made immediately. Assume that thesepayments were computed using a 10 percent annual interest rate.Which of the following statements is true? a. The $100,000 gain onthe original sale must be recognized by Owens immediately. b. The$100,000 gain on the original sale will be recorded by Owens asother comprehensive income. c. The $100,000 gain on the originalsale will be deferred until the end of the lease and thenrecognized as a gain. d. The $100,000 gain on the original salewill be deferred and then written off each year as a reduction inthe depreciation expense on the leased warehouse.

The Turpen Company buys a machine for $30,000. Normally, themachine would be sold to a customer for $42,000. However, in hopesof expanding the number of available customers, Turpen leases themachine for 4 years to the Royal Corporation. The accountants forthe Turpen Company are currently studying how this lease should berecorded for financial reporting purposes. Which of the followingstatements is true?

a.Because this property is normally sold, the lease contractmust be recorded as a capital lease by Turpen.

b.Because this property is normally sold, the lessee (Royal)must report it as a sales-type lease.

c.If the machine has an expected life of five years, then bothparties must report the transaction as a capital lease.

d.If the lease contract gives Royal the option to buy themachine at the end of four years, then both parties must report thetransaction as a capital lease

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