Neils Company Leased an Asset for Use in Its Factory

question 16

Multiple Choice

Neils Company leased an asset for use in its factory.The lease agreement specifies that Neils is to make annual payments of $2,818 payable at the end of each year.The lessor classified the lease as a direct-financing lease since Neils was allowed to lease the asset at its cost of $14,000 (the present value of the lease payments) .The lessor receives a 12 percent rate of return on the lease.The estimated residual value at the end of the lease term is zero. If the lease was classified as a capital lease by Neils,how much annual depreciation would Neils record using the straight-line method?

• A) $1,400
• B) $1,310
• C) $1,750
• D) $2,818

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Definitions:

Materials Quantity Variance

The difference between the actual quantity of materials used in production and the expected quantity, multiplied by the standard cost per unit of material.

Kilos

A metric unit of mass equal to one thousand grams, commonly used for measuring weight in many countries.

Materials Price Variance

The difference between the actual cost of materials and the standard cost, multiplied by the quantity purchased.

Ounces

A unit of weight commonly used in the United States and the United Kingdom, equal to one-sixteenth of a pound.