On January 1, 2019, Precision Pumps Leases Nonspecialized Pumping Equipment

question 8

Multiple Choice

On January 1, 2019, Precision Pumps leases nonspecialized pumping equipment to Mega Construction. The equipment is delivered on January 1. The lease term is 4 years with no renewal or purchase options, and title to the leased asset is retained by the lessor at the end of the lease term. The lease requires annual fixed rental payments of $9,000 per year beginning on January 1, 2019, and then December 31 of each year starting on December 31, 2019. The fair value of the equipment is $41,627 and has a carrying amount on Precision's books of $28,306. The equipment has a remaining life of 8 years. The estimated residual value of the equipment is $15,000. The lessee does not guarantee the residual value, but Precision secured an unrelated third party to guarantee $15,000; collection of this guaranteed residual value and lease payments are reasonably certain. The rate implicit in the lease is 10%. There are no prepaid rentals, and neither party to the agreement pays initial direct costs. What amount of Sales Revenue is recorded at commencement of the lease?

• A) $36,000
• B) $31,382
• C) $41,627
• D) $28,306

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Definitions:

Units Transferred

Units transferred refer to the quantity of goods moved from one stage of production or department to another within a manufacturing process or for delivery.

Cost Reconciliation

The process of analyzing and adjusting the differences between the reported cost and the actual cost.

Direct Method

An approach in cost accounting used to allocate service departments' costs directly to production departments without intermediate steps.

Service Department

An organizational unit that provides support services to other parts of an organization, rather than directly contributing to revenue generation.