Deck 13: Leases

Question 1

Generally accepted accounting principles require that certain lease agreements be accounted for as purchases.The theoretical basis for this treatment is that a lease of this type

A)Effectively conveys all of the benefits and risks incident to the ownership of property
B)Is an example of form over substance
C)Provides the use of the leased asset to the lessee for a limited period of time
D)Must be recorded in accordance with the concept of cause and effect

Answer 1

A

Question 2

A six-year-capital lease entered into on December 31,2016,specified equal minimum annual lease payments due on December 31,2017.Minimum payment applicable to which of the following increased over the corresponding December 31,2017,minimum payment? The company is applying SFAS No.13) Reduction of
Interest Expense Liability

A)Yes Yes
B)Yes No
C)No Yes
D)No No

Answer 2

C

Question 3

Which of the following is one of the lease capitalization criteria under SFAS No.13?

A)The minimum lease payments excluding executory costs)equal or exceed 90% of the fair value of the leased property
B)The lease transfers ownership of the property to the lessor
C)The lease contains a purchase option
D)The lease term is equal to or more than 75% of the estimated economic life of the leased property

Answer 3

D

Question 4

When measuring the present value of future rentals to be capitalized as part of the purchase price in a lease that is be accounted for as a purchase,identifiable payments to cover taxes,insurance,and maintenance should be

A)Included in the future rentals to be capitalized
B)Excluded from future rentals to be capitalized
C)Capitalized but at a different discount rate and recorded in a different account than future rental payments
D)Capitalized but at a different discount rate and for a relevant period that tends to be different than that for future rental payments

Question 5

Based solely upon the following sets of circumstances,indicate below which set gives rise to a sales type or direct financing lease of a lessor,under SFAS No.13: Transfers Contains
Ownership bargain
By end of purchase
Lease? Provision?

A)No Yes
B)Yes No
C)Yes Yes
D)No No

Question 6

For the lessor to recognize a lease as a sales-type lease,under SFAS No.13,the following must occur.

A)At least one of the capital lease criteria is met,at least one of the certainty criteria is met,and there is a manufacturer or dealer's profit.
B)At least one of the capital lease criteria is met,both certainty criteria are met,and there is a manufacturer or dealer's profit.
C)More than one of the capital lease criteria are met,both certainty criteria are met,and there is a manufacturer or dealer's profit.
D)Only one of the capital lease criteria is met,both certainty criteria are met,and there is a manufacturer or dealer's profit.

Question 7

What is the primary accounting issue for lessors?

A)Off-balance sheet financing.
B)Revenue recognition and expense allocation over the lease term.
C)Treating the lease in the same manner as the lessee does.
D)Determining whether the lease is a sales-type lease or a direct financing lease.

Question 8

When a lease contract does not transfer title to the lessee,there is no bargain purchase option,and the lease term is not at least 75 percent of the estimated useful life of the leased asset.

A)The lessee must classify the lease as an operating lease.
B)The amount of unguaranteed salvage value,if any,determines whether the lease is a capital lease or an operating lease.
C)The interest rate used to determine the present value of the minimum lease payments also determines whether the lease is a capital lease or an operating lease.
D)The lessee must use the greater of the lessor's rate of return or the lessee's incremental borrowing rate to determine whether the lease is a capital lease or an operating lease.

Question 9

What is the primary accounting issue for lessees?

A)Recording interest expense on the lease obligation.
B)Determining whether the lease meets the 90% of fair value test.
C)Off-balance sheet financing.
D)The measurement of the leased asset under a capital lease.

Question 10

The appropriate valuation of an operating lease on the statement of financial position of a lessee is

A)Zero
B)The absolute sum of the lease payments
C)The present value of the sum of the lease payments discounted at an appropriate rate
D)The market value of the asset at the date of the inception of the lease

Question 11

Under the capital method of accounting for leases,under SFAS No.13,the excess of aggregate rentals over the cost of leased property should be recognized as revenue of the lessor

A)In increasing amounts during the term of the lease
B)In constant amounts during the term of the lease
C)In decreasing amounts during the term of the lease
D)After the cost of leased property has been fully recovered through rentals

Question 12

The primary difference between a direct-financing lease and a sales-type lease under SFAS No.13 is the

A)Recognition of the manufacturer's or dealer's profit at or loss)the inception of the lease
B)Amount of the depreciation recorded each year by the lessor
C)Allocation of initial direct costs by the lessor to periods benefited by the lease arrangements
D)Manner in which rental receipts are recorded as rental income

Question 13

Under SFAS No.13,equal monthly rental payments for a particular lease should be charged to rental expense by the lessee for which of the following? Capital lease Operating lease

A)Yes No
B)Yes Yes
C)No No
D)No Yes

Question 14

Lessees prefer to account for their leases as operating leases because:

A)This decreases the amount of liability reported
B)This increases their debt to total equity ratio
C)This decreases the income tax expense.
D)This increases the amount of total assets.

Question 15

When does the lessee report executory costs as an expense?

A)When they are spelled out in the lease agreement.
B)Only when they are incurred by the lessee and the lease is classified as a capital lease.
C)When they are incurred by the lessee.
D)Only when they are incurred by the lessee and the lease is classified as an operating lease.

Question 16

For a sales-type lease,under SFAS No.13,the net investment is equal to

A)The present value of the minimum lease payments plus executor costs.
B)The net investment minus unearned income.
C)Sales minus the gross profit recognized on the sale.
D)The present value of the gross investment.

Question 17

Under SFAS No.13,for a lease that is recorded as a sales-type lease by the lessor,the difference between the gross investment in the lease and sum of the present values of the components of the gross investment should be recognized as income

A)In full at the lease's expiration
B)In full at the lease's inception
C)Over the period of the lease using the interest method of amortization
D)Over the period of the lease using the straight-line method of amortization

Question 18

For a six-year capital lease,under SFAS No.13,the portion of the minimum lease payment in the third year applicable to the reduction of the obligation should be

A)Less than in the second year
B)More than in the second year
C)The same as in the fourth year
D)More than in the fourth year

Question 19

Office equipment recorded under a capital lease containing a bargain purchase option should be amortized under SFAS No.13

A)Over the period of the lease using the interest method of amortization
B)Over the period of the lease using the straight-line method of amortization
C)In a manner consistent with the lessee's normal depreciation policy for owned assets
D)In a manner consistent with the lessee's normal depreciation policy for owned assets except that the period of amortization should be the lease term

Question 20

In computing the present value of the minimum lease payments under SFAS No.13,the lessee should

A)Use its incremental borrowing rate in all cases
B)Use either its incremental borrowing rate or the implicit rate of the lessor,whichever is higher,assuming that the implicit rate is known to the lessee
C)Use either its incremental borrowing rate or the implicit rate of the lessor,whichever is lower,assuming that the implicit rate is known to the lessee
D)Use the implicit rate in all cases.

Question 21

Which of the following would indicate that the lessee should not classify a lease as a capital lease under SFAs No.13?

A)The fair value of the leased asset is $100,000 and the present value of the minimum lease payments is $95,000.
B)The lease provides for no unguaranteed salvage value.
C)The lessee has the option to purchase the leased asset in 4 years for $2 when the asset's salvage value is expected to be $20,000.
D)The asset's useful life is 20 years;a 4-year lease occurs when the asset is 26 years old.

Question 22

Under the provisions of ASU 2016-02,which of the following is not required in a lease modification when the lease payments re required to be remeasured?

A)Any variable lease payments that are based on a rate or index will need to be remeasured.
B)The total lease liability is remeasured
C)The remeasured lease must be subsequently recorded as an operating lease
D)The lessee is generally required to use an updated discount rate.

Question 23

Under the provisions of ASU 2016‐02 sale‐leaseback accounting is virtually eliminated.as an off‐balance sheet financing proposition,because both the seller‐lessee and a buyer‐lessor will apply the provisions of FASB ASC 602 Revenue Recognition to determine whether a sale has occurred.Accordingly,which of the following is not a criterion that must be met to record a sale-leaseback a sale?

A)The transaction meets the sale guidance in the new revenue recognition standard.
B)The transaction is a leveraged lease
C)The leaseback is not a finance or a sales‐type lease
D)If there is a repurchase option,the exercise price is at the asset's fair value at the time of exercise,and alternative assets that are substantially the same as the transferred asset are readily available in the marketplace.

Question 24

The key difference between ASU 2016-02 and SFAS No.13 in accounting for leases by lessees is

A)The recognition of a right‐to‐use asset ROU)and lease liability on the statement of financial position for those leases previously classified as operating leases under SFAS No.13
B)Leases will be measured at their fair value by lessees
C)The classification of a lease as a finance by a lessee is based on a completely new set of criteria than was used in SFAS No.13.
D)There are no major differences between the two standards in accounting for leases by lessees.

Question 25

If the lessor incurs initial direct cost to bring about the lease,when are those costs expensed in total during the first year of the lease term under SFAS No.13?

A)When the lease is classified as a sales-type lease.
B)When the lease is classified as a direct financing lease.
C)When the lease is classified as an operating lease.
D)Initial direct costs are always expensed during the first year of the lease term.

Question 26

Under the provisions of ASU 2016-02 which of the following is not a criterion to use in determining whether a lessee should classify a lease as a finance lease?

A)The lease transfers ownership of the underlying asset to the lessee by the end of the lease term
B)The lease grants the lessee an option to purchase the underlying asset the lessee is reasonably certain to exercise
C)The lease term is for the major part of the remaining economic life of the underlying asset
D)The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds 50 percent of the fair value of the underlying asset.

Question 27

The major difference between ASU 2016-02 and IFRS No.16 is

A)All leases must be recorded as finance leases by lessees under ASU 2016-02;whereas,some leases may be recorded as operating leases by lessees under IFRS No.16.
B)All leases must be recorded as finance leases by lessees under IFRS No.16;whereas,some leases may be recorded as operating leases by lessees under ASU 2016-02
C)All leases must be recorded as finance leases by lessors under ASU 2016-02;whereas,some leases may be recorded as operating leases by lessors under IFRS No.16
D)All leases must be recorded as finance leases by lessors under IFRS No.16;whereas,some leases may be recorded as operating leases by lessors under ASU 2016-02.

Question 28

Under the provisions of ASU 2016-02,in the event a lease does not qualify as a sales-type lease by a leaser,which of the following is not a criterion to be met to qualify the lease as a direct financing lease?

A)The present value of the sum of lease payments and any residual value guaranteed by the lessee that is not already reflected in lease payments and/or any other third party unrelated to the lessor equals or exceeds substantially all of the fair value of the underlying asset
B)It is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value guarantee
C)The lease transfers ownership of the underlying asset to the lessee by the end of the lease term
D)All leases that do not qualify as sales type leases for lessor are recorded as direct financing leases.

Question 29

When a sale and leaseback occurs under SFAS No.13

A)A gain or loss on the sale of the leased asset is deferred and amortized over the lease term.
B)A gain on sale of the leased asset is deferred and amortized over the lease term.
C)Whether a gain or loss on sale of the leased asset is deferred and amortized over the lease term depends on whether the lease is classified as a capital lease or an operating lease.
D)Both gains and losses are recognized in earnings when the asset is sold.

Question 30

Under the provisions of ASU 2016-02

A)Accounting by lessors for leases is virtually unchanged from what was required by SFAS No.13
B)Accounting by lessees for leases is virtually unchanged from what was required by SFAS No.13
C)Accounting by lessors for leases re is significantly changed from what was required by SFAS No.13
D)Accounting by lessees and lessors for leases is virtually unchanged from what was required by SFAS No.13.