Exhibit 21-5 the Chicago, Inc - Refer to Exhibit 21-5

question 86

Multiple Choice

Exhibit 21-5 The Chicago, Inc.entered into a five-year lease with the Urbana Company on January 1, 2010.Chicago, the lessor, will require that five equal annual payments of $25, 000 be made at the beginning of each year.The first payment will be made on January 1, 2010.The lease contains a bargain purchase option price of $12, 000, which the lessee may exercise on December 31, 2014.The lessee pays all executory costs.The cost of the leased property and its normal selling price are $95, 000 and $118, 236, respectively.Collectibility of the future lease payments is reasonably assured, and the lessor does not expect to incur any future costs related to the lease.Present value factors for a 7% interest rate are as follows:
$\begin{array}{llr} \text { Present value of \( \$ 1 \) for \( n=1 \) } &0.934579\\ \text { Present value of \( \$ 1 \) for \( n=5 \) } &0.712986\\ \text { Present value of an ordinary annuity for \( n=5 \) } &4.100197\\ \text { Present value of an annuity due for \( n=5 \) } &4.387211\\\end{array}$


- Refer to Exhibit 21-5.If Chicago requires a 7% annual return, the lease should be classified as a(n)

• A)operating lease
• B)direct financing lease
• C)sales-type lease
• D)leveraged lease

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Definitions:

Variable Overhead Efficiency Variance

A measure used to assess the efficiency of variable overhead resource usage, calculated as the difference between actual and expected costs based on standard usage rates.

Direct Materials Purchases Variance

The difference between the actual cost of materials purchased and the expected cost at standard prices.

Direct Labor-Hours

An alternative term for direct labor-hour, referring to the labor time spent by employees directly on manufacturing a product.

Materials Price Variance

The difference between the actual cost of materials purchased and the expected (standard) cost times the actual quantity of materials used.