13E: Wrong Answers

Question 0

Leasehold improvements are capitalized and amortized over…

Answer 0

The shorter of the remaining life of the lease and the useful
Life of improvements

Question 1

Accrued rent receivable equation

Answer 1

Accrued rent receivable = rent revenue - cash collections

Question 2

When the residual value is guaranteed by a third party, the lessee’s minimum lease payments include only…

Answer 2

The rentals

Question 3

If interest payments are made on January 1st of each year on a capital lease, can the principal amount be affected on October 1st by accrued interest?

Answer 3

No

Question 4

When calculating the initial lease liability, annual Executory costs are…3

Answer 4

1 not an expense or liability until incurred

2 excluded from minimum lease payments

3 not reflected in initial lease liability

Question 5

In a six year capital lost starting December 31, year 1:

Does the first payment made on December 31, yr. 1 include interest expense? Does it include a lease liability?

Answer 5

Includes lease liability, but first payment doesn’t include interest
Expense

Question 6

If the lease term is 5 years and the useful life is 8 years, what amount will be used to calculate depreciation if a bargain purchase option is exercised?

Answer 6

8 years

Because intend to use it over its useful life

Question 7

Note disclosure: Aggregate amount for lease term

Answer 7

Is total remaining lease payments in the agreement

Question 8

Note disclosure: amount for appropriate required period

Answer 8

Total lease payments over next 5 years

Question 9

When a bargain purchase option exists, at the end of the lease the balance in the lease payable column should equal…

Answer 9

The bargain purchase option price

Question 10

Failure to include the present value of the bargain purchase option price in the beginning present value of the lease would result in…

Answer 10

An ending balance in the lease payable column of zero

Question 11

Sale leaseback arrangements are treated as though…

Answer 11

2 transactions were a single financing transaction if the lease
Qualifies as a capital lease

Question 12

In a sale leaseback arrangement any gIn or loss is deferred and amortized over the life of the lease term if…

Answer 12

possession reverts to lessor

Question 13

In a sale leaseback arrangement any gIn or loss is deferred and amortized over the economic life if…

Answer 13

Ownership transfers to the lessee

Question 14

In a sale leaseback transaction, the seller lessee has retained the property, the gain on sale should be…

Answer 14

Deferred for both capital and operating leases

Question 15

An example of an operating lease in which substantially all of the remaining use of the leased asset is retained by the lessee occurs when the lease term begins…

Answer 15

Within the last 25% of the asset’s original useful life

Question 16

Deferred gain from sale leaseback transaction acts as…

Answer 16

Asset valuation allowance

Question 17

Deferred gain acts as an asset valuation allowance resulting in net amount shown for leased asset being equal to…

Answer 17

Same carrying value as if sale and leaseback transaction had

Not occurred

Question 18

A modification to a capital lease that changes the classification of the lease to an operating lease requires the transaction be accounted for as…

Answer 18

A sales leaseback transaction, defer gain and recognize it over
Life of operating lease

Question 19

How do you record the journal entry for a capital lease payment made by the lessee?

Answer 19

Capital lease liability. Xxx

Cash. Xxx

Question 20

How do you record the journal entry of the lessee for expenses associated with a capital lease?

Answer 20

Depreciation exp. Xxx
Accumulated depr. Xxx

Interest expense. Xxx
Capital lease liability. Xxx

Question 21

Sales type lease

Answer 21

Sales revenue (the present value of the minimum lease payments)
Less the carrying amount of the leased asset 

is reported on the Lessor’s income statement at the inception of the lease

Question 22

Direct financing lease

Answer 22

Interest revenue is the only item reported on the income statement
Over the lease term

Question 23

Operating lease- lessee

Answer 23

Rental payments are recognized on a straight line basis

even though the lease calls for payments that increase over the
term of the lease

Question 24

Operating lease- lessor

Answer 24

Initial direct costs should be treated as an asset and amortized
Over the life of the lease on a straight line basis

Question 25

Unearned interest revenue

Answer 25

The difference between the fair value of the asset leased and the
Total payments to be received over the lease term

Question 26

Residual value

Answer 26

Included in the lessor’s gross investment, whether guaranteed
Or Unguaranteed

Question 27

Capital lease

Answer 27

Depreciation expense related to the leased asset is reported
on the lessee’s income statement over the lease term

Question 28

Implicit rate

Answer 28

Produces a desired rate of return which causes the aggregate
Present value of the minimum lease payments to be equal to
The fair value of the leased property

Question 29

Interest method

Answer 29

Produces a constant periodic rate of return on the net investment

Question 30

Present value of the minimum lease payments

Answer 30

Should be recorded as both an asset and a liability by the lessee
When the lease contains a bargain purchase option

Question 31

Bargain purchase option

Answer 31

Lessee’s right to purchase leased property for an amount

substantially lower than the expected FV at exercise date

Question 32

Sale leaseback

Answer 32

The substance of this transaction is that it consists of two separate
And distinct transactions

Question 33

Annuity due

Answer 33

A lease agreement which requires the annual payments to be

made at the beginning of each period

Question 34

Initial direct costs

Answer 34

Costs, such as appraisal fees, incurred by the lessor in setting up
The lease agreement

Question 35

Current lease obligation

Answer 35

The principal portion of the lease liability which must be paid
within the next operating cycle

Question 36

As a capital lease progresses, the interest expense…

2) the carrying amount of the lease…

Answer 36

Decreases for the lessee

2) decreases for the lessee

Question 37

Depreciation expense is calculated using (in the numerator)…

Answer 37

The present value of the minimum lease payments

Question 38

When a bargain purchase option exists, depreciation is calculated using…

Answer 38

The asset’s useful life

Question 39

If a capital lease is modified in such a way that it qualifies as an operating lease, it should be treated as…

Answer 39

A sales-leaseback transaction

Question 40

If a seller lessee retains substantially all rights to use the property in a sales leaseback transaction, the gain on sale is…

Answer 40

Deferred by the seller lessee

Question 41

Unguaranteed residual is considered part of…

Answer 41

The lessor’s net investment in lease unless there’s a transfer of
Title or bargain purchase option

Question 42

Unguaranteed residual, is it part of the minimum lease payment for the lessee?

Answer 42

Not part of the minimum lease payment it is ignored

Question 43

Do minimum lease payments include penalties?

Example

Answer 43

Yes

Ex. Failure to renew

Question 44

Initial direct costs, how are they treated by the lessor?

Answer 44

Should be capitalized and amortized straight line over the life
Of the lease

Question 45

Free or uneven lease payments received by the lessor should be recognized…

Answer 45

As revenue on a straight line basis and prorated over the life
Of the lease