On January 1st, 2014, ABC Inc

question 72

Multiple Choice

On January 1st, 2014, ABC Inc.(the lessor) agrees to lease a piece of specialized piece of machinery to DEF Inc.(the lessee) for 5 years.ABC Inc.is a financial intermediary specializing in leasing arrangements such as the one described below.Details are as follows: Fair value of machinery at inception of the lease: $100,000.Lease term: 5 years (no bargain renewal terms) .
Executory costs of $10,000 are reimbursed by the lessee.
5 Annual lease payments of $23,000 each are made on January 1st of each year starting on January 1st, 2014.
Bargain purchase option at end of lease: $5,000.It is estimated that the equipment will have a fair value of $10,000 at the end of the lease.
Economic life of the asset is 10 years, after which the equipment will be worthless.Straight-line depreciation applies.
ABC's implicit interest rate with respect to this lease is 10%.This is rate is known by DE Inc.
DEF Inc's incremental borrowing rate is 9%.
Assuming that this qualifies as a finance lease, at what amount would DEF Inc.capitalize the leased machinery at the inception of the lease as per ASPE (rounded) ?

• A)$100,764
• B)$95,907
• C)$99,011
• D)$100,000

Differentiate between long-term investments and property, plant, and equipment in the context of a balance sheet.

Identify the criteria and examples of current liabilities.

Understand the correct order of liquidity for listing current assets.

Acknowledge the need for correct account usage and the impact of incorrect entries.

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Definitions:

Asymmetric Information

A situation where one party in a transaction has more or better information than the other, leading to an imbalance in power and potentially unfair outcomes.

Vertically Integrated

A business model in which a company controls multiple stages of production which would normally be operated by separate companies.

Production Capacities

The maximum output levels that a company or economy can achieve with the current resources and technology.

Vertically Integrated

A form of business organization where a company controls multiple stages of production or distribution within the same industry, from raw materials to final product delivery.