Question 1

Phoenix Corp. leases office space under a 4-year lease with annual payments of $80,000 due at the beginning of each year. Phoenix's incremental borrowing rate is 8%. The present value of an annuity due of $1 for 4 periods at 8% is 3.5771.

If Phoenix classifies this as an operating lease, what is the total lease cost Phoenix will recognize in Year 1?

Accepted Answer

For operating leases under ASC 842, calculate total lease payments over the lease term, then divide by the number of years for straight-line recognition. Operating leases have a single lease cost, not separate interest and amortization.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Using finance lease calculations (interest + amortization), using present value amounts for expense recognition, or not recognizing straight-line cost

How to approach this question

Full Answer

Common mistakes

Practice the full CPA FAR Practice Exam 2

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