Capitial Leases

Question 1

The 4 criteria needed to determine whether a lease is a capital lease as opposed to an operating lease are:

Answer 1

1. Lease title is transferred
2. Lease contains a bargain purchase option
3. Lease term is at least 75% of remaining economic life of asset leased at inception
4. PV of min lease pmts at the inception of the lease is at lease 90% of the market value of the leased asset.

If any ONE of these criteria are met, the lease is classified as an CAPITAL lease

(TTBPO 75 or 90 jingle)

Question 2

Additional criteria must be met for the lessor to recognize a capital lease as a sale. TF

Answer 2

True, for it to be recognized as a sale revenue must be collectible and the process must be substantially complete

Question 3

The lease term consists of two parts. The _____ ________ _____ and periods covered by bargain renewal options.

Answer 3

Non-cancellable fixed portion

Question 4

Executory costs include:

Answer 4

Insurance, maintenance, property taxes

Question 5

Executory costs are always (expensed/capitalized).

Answer 5

Expensed, never capitalized

Question 6

The PV calculation used in criteria #4 is the lesser of which 2 rates?

Answer 6

The lessor’s implicit rate

The lessee’s incremental borrowing rate on similar debt

Question 7

With STL’s, on the lessor side, the guarantee status effects which two accounts?

Answer 7

Sales and COGS are subtracted by the PV of the unguaranteed residual.

Question 8

What is a sale leaseback?

Answer 8

When the owner of an asset sells it and immediately leases it back.

Question 9

A major leaseback occurs when:

Answer 9

The PV of the minimum lease payments is greater or equal to 90% of the assets FV. In this situation, the gain is always deferred and amortized against depreciation expense.

Question 10

If the leaseback is a capital lease the gain is recorded in a ________ asset account and _______ as a reduction in dep exp.

Answer 10

contra leased, amortized

Question 11

If the leaseback is an operating lease, the gain is recorded in a ____ account and amortized as a reduction in _____ expense

Answer 11

liability, rent

Question 12

In minor leases (PV of payments is less than 10% of assets FV) no deferral of revenue is recorded. TF

Answer 12

True

Question 13

In less than major but more than minor (PV of payments between 10% and 90% of assets FV) gains are deferred. TF

Answer 13

True

Question 14

Lessees are required to disclose the gross amount of assets recorded under capital leases. TF

Answer 14

True

Question 15

Lessees are required to disclose executory costs incurred. TF

Answer 15

True, but not factored into the actual lease payment amount

Question 16

Lessors are required to disclose nothing regarding a general description of the lease. TF

Answer 16

False

Question 17

Lessors are required to disclose the net lease receivable amount. TF

Answer 17

True

Question 18

Sale capital leaseback gains are recorded in operating income. TF

Answer 18

False, asset valuation allowance

Question 19

Sale operating leaseback gains are recorded in an asset valuation allowance. TF

Answer 19

False, a deferred credit

Question 20

Free or uneven lease payments received by the lessor should be recognized as revenue when the lease payment is received. TF

Answer 20

False, recognized as revenue on a SL basis and prorated over the life of the lease

Question 21

Direct costs should be capitalized and amortized on a a SL basis by the lessor over the life of the lease. TF

Answer 21

True

Question 22

If a capital lease is modified in such a way that it qualifies as an operating leases, it should be treated as a sales-leaseback transaction. TF

Answer 22

True. sales leaseback treatment is appropriate