FAR Task-Based Simulations
Exam-realistic SIMs with live grading and step-by-step answer keys.
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Scenario — FAR SIM #1
Lease Accounting — ASC 842
Meridian Manufacturing Co. ("Meridian"), a calendar-year public company, enters into a lease agreement with Industrial Properties LLC on January 1, 20X1 for specialized production equipment. Meridian has adopted ASC 842 and uses the effective-interest method for lease liabilities and straight-line amortization for ROU assets on finance leases.
Exhibit A — Lease Terms
| Term | Detail |
|---|---|
| Lease commencement | January 1, 20X1 |
| Lease term | 5 years (non-cancelable) |
| Annual lease payments | $60,000 (paid at end of each year) |
| Residual value guarantee by lessee | None |
| Purchase option | None |
| Useful life of equipment | 5 years |
| Incremental borrowing rate (IBR) | 6.0% per annum |
| Implicit rate in lease | Not determinable by lessee |
| Initial direct costs | None |
| Lease incentives received | None |
Exhibit B — PV Factor Table (6%)
| Period (n) | PV of $1 (6%) | PV Annuity of $1 (6%) |
|---|---|---|
| 1 | 0.94340 | 0.94340 |
| 2 | 0.89000 | 1.83339 |
| 3 | 0.83962 | 2.67301 |
| 4 | 0.79209 | 3.46511 |
| 5 | 0.74726 | 4.21237 |
Exhibit C — Balance Sheet Excerpt (Pre-Lease, Jan 1, 20X1)
| Account | Balance |
|---|---|
| Total assets | $4,850,000 |
| Total liabilities | $2,100,000 |
| Stockholders' equity | $2,750,000 |
Task 1 of 4
Lease Classification & Present Value
Determine whether this lease is a finance or operating lease under ASC 842, and calculate the present value of the lease payments at commencement.
1a. This lease should be classified as a:
1b. Present value of lease payments (Jan 1, 20X1):
Task 2 of 4
Initial Recognition — Entry Amounts
Determine the amounts Meridian records for the ROU asset and lease liability at commencement.
| Account | Debit | Credit |
|---|---|---|
| Right-of-Use Asset | $ | — |
| Lease Liability | — | $ |
Task 3 of 4
Year 1 Expense & Liability Balance
Calculate Year 1 (20X1) income statement amounts and the lease liability balance at Dec 31, 20X1.
Interest expense for Year 1:
Amortization expense for Year 1:
Lease liability balance, Dec 31, 20X1:
Task 4 of 4
Year 1 Journal Entries
Prepare (A) the commencement entry and (B) the year-end entry for the first payment + amortization.
Entry A — Lease Commencement (Jan 1, 20X1):
| Account | Debit | Credit |
|---|---|---|
| Right-of-Use Asset | $ | — |
| Lease Liability | — | $ |
Entry B — Dec 31, 20X1 (Payment + Amortization):
| Account | Debit | Credit |
|---|---|---|
| Interest Expense | $ | — |
| Lease Liability (principal) | — | — |
| Cash | — | $ |
| Amortization Expense — ROU | $ | — |
| Accumulated Amort. — ROU | — | $ |