ACCT Ch.12 HW Flashcards
If a corporation signs a ten-year lease for a building and the present value of the lease payments is $250,000, the lease is a finance lease under ASC 842 if the:
- fair value of the building is $1,000,000
- remaining useful life of the building is 20 years.
- lessor can purchase the building for $5,000 at the end of the lease when the fair value is estimated to be $25,000.
- building reverts back to the lessor at the end of the lease.
lessor can purchase the building for $5,000 at the end of the lease when the fair value is estimated to be $25,000.
If a corporation signs a ten-year lease for a building and the present value of the lease payments is $250,000, the lease is a capital lease under ASC 840 if the:
- fair value of the building is $1,000,000
- remaining useful life of the building is 20 years.
- lessor can purchase the building for $5,000 at the end of the lease when the fair value is estimated to be $25,000.
- building reverts back to the lessor at the end of the lease.
lessor can purchase the building for $5,000 at the end of the lease when the fair value is estimated to be $25,000.
When accounting for a long-term operating lease under ASC 842, which one of the following accounts are charged with the expense on the lessee’s income statement?
Lease expense
GAAP establishes specific criteria for the treatment of leases under ASC 840. Which of the following does not accurately describe the criteria applicable to a lessee?
- The lease agreement contains a bargain purchase option.
- The lease term is equal to or exceeds 75% of the leased asset’s useful life.
- The lease agreement transfers title of the leased asset to the lessee at the end of the lease term.
- The present value of the minimum lease payments is equal to or greater than 75% of the leased asset’s fair value.
The present value of the minimum lease payments is equal to or greater than 75% of the leased asset’s fair value.
Under ASC 840, a lessee mistakenly treated an operating lease as a capital lease. How does this mistake impact the following at the inception of the lease?
Total Assets Total Liabilities
TA=overstated
TL=overstated
Under ASC 840, a lessee mistakenly treated an operating lease as a capital lease. How does this mistake impact the following at the inception of the lease?
Current Ratio Asset Turnover Ratio
CR=understated
AT=understated
Compared to a firm with a capital lease, operating leases under ASC 840 help the lessee firm earn:
- a higher asset turnover ratio.
- a lower return on assets.
- a higher debt-to-equity ratio.
- a lower NOPAT.
- a higher asset turnover ratio
GAAP establishes specific criteria for the treatment of leases under ASC 840 and ASC 842. If any of the criteria are met, the lessee:
- must treat the lease as an operating lease under ASC 840.
- must treat the lease as a capital lease under ASC 840 or a finance lease under ASC 842.
- may choose the treatment if two or less criteria are met.
- may elect to treat the lease as an operating lease under ASC 840 and ASC 842 if only one criterion is met.
must treat the lease as a capital lease under ASC 840 or a finance lease under ASC 842.
When accounting for an operating lease under ASC 840, which one of the following accounts are charged with the expense on the lessee’s income statement?
- Depreciation Expense
- Amortization Expense
- Rent Expense
- Lease Operating Expense
Rent Expense
T/F
Under ASC 840, when accounting for an operating lease, a liability is recognized when the lease is signed by the lessee.
False
T/F
Under ASC 842, when accounting for a long-term operating lease, a liability is recognized when the lease is signed by the lessee.
True
T/F
Under ASC 840, operating leases are financial statement examples of off -balance sheet financing.
True
T/F
Loan covenants are one reason lessees prefer operating lease treatment.
True
T/F
Managers in lessee companies prefer that leases be treated as capital leases.
False
