Leewin Brokerage Enters into a Lease Agreement with Bumble Motors

question 106

Multiple Choice

Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $76,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,000 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,000, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 6% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $1,100. In addition to the information provided above, assume that Bumble provided a $6,000 incentive. Assuming that this is classified as an operating lease, what is the annual lease expense reported on the income statement?

• A) $10,000
• B) $12,220
• C) $11,100
• D) $11,020

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Definitions:

Debit Card

A card that directly subtracts funds from a buyer's checking account to finance a purchase.

Credit Card

A payment card issued by a financial institution that allows the cardholder to borrow funds with the promise to repay, with interest, at a later date.

Relative Cumulative Frequency

A statistical measure that shows the proportion of observations below a particular value in a dataset.

Percentile

A measure that indicates the value below which a given percentage of observations in a group falls.