4.2 Leases

Question 1

If the lease term is less than 12 months, when may a lessee elect not to recognize the right-of-use asset and lease liability?

A. The term of the lease is for the major part of the remaining economic life of the leased asset.
B. The lease transfers ownership of the leased asset to the lessee by the end of the lease term.
C. The present value of the sum of (1) the lease payments and (2) any residual value guaranteed by the lessee is 90% or more of the fair value of the leased asset.
D. The lease does not include a purchase option that the lessee is reasonably certain to exercise.

Answer 1

D. The lease does not include a purchase option that the lessee is reasonably certain to exercise.

Question 2

The amount recorded initially by the lessee as a lease liability should normally

A. Exceed the total of the lease payments
B. Exceed the present value of the lease payments at the beginning of the lase
C. Equal the total of the lease payments.
D. Equal the present value of the lease payments at the beginning of the lease.

Answer 2

D. Equal the present value of the lease payments at the beginning of the lease.

Question 3

On January 1, Year 1, Lessee entered into a 4-year lease that does not transfer ownership at the end of the lease term. It also includes a purchase option not reasonably expected to be exercised. The leased asset has (1) a 6-year economic life, (2) no residual value, and (3) a present value of the annual lease payments equal to 75% of the leased asset’s fair value. If the leased asset has no alternative use to the lessor at the end of the lease term, how should Lessee classify the lease?

A. Operating
B. Finance
C. Short-term
D. Sales-type

Answer 3

B. Finance

Question 4

Which of the following is a criterion for a lease to be classified as a finance lease in the books of a lessee?

A. The lease contains a purchase option that the lessee is reasonably certain to exercise.
B. The lease does not transfer ownership of the property to the lessee.
C. The lease term is equal to 65% or more of the estimated useful life of the leased property.
D. The present value of the minimum lease payments is 70% or more of the fair market value of the lease property