Ch 21 - Quiz Flashcards
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 term is equal to 65% or more of the estimated useful life of the leased property.
B.) The present value of the minimum lease payments is 70% or more of the fair value of the leased property.
C.) The lease contains a bargain purchase option.
D.) The lease does not transfer ownership of the property to the lessee.
C.) The lease contains a bargain purchase option.
A bargain purchase option is one of the five criteria for a finance lease to be recorded by the lessee. Only one criterion needs to be met. A bargain purchase option implies that, at inception, the lessee will purchase the asset at the end of the lease term because the option price will be significantly below the market price of the asset at that time.
Marnie Company enters into a two-year lease. The terms of the lease do not transfer ownership and do not contain a bargain purchase option. The lease is for 60% of the asset’s economic life and represents 80% of its fair value. The asset is not a specialized asset and does have alternative uses. How should Marnie classify and record the lease?
A.) The lease should be classified as a finance lease, and a lease liability should be recorded at the inception of the lease.
B.) The lease should be classified as an operating lease, and a lease liability should be recorded at the commencement date of the lease.
C.) The lease is classified as an operating lease, and no lease liability is recorded at the inception because it does not meet finance lease criteria.
D.) The lease should be classified as a short-term lease because it is for only two years.
B.) The lease should be classified as an operating lease, and a lease liability should be recorded at the commencement date of the lease.
The lease exceeds 12 months but does not meet any of the classification criteria for a finance lease. Marnie should classify this lease as an operating lease and record a lease liability at the inception of the lease.
Lessee and lessor entered into a lease. The lease is classified as an operating lease by both the lessee and lessor. The lease term is shorter than the useful life of the asset. How will the leased asset be accounted for?
A.) The lessor will retain the asset on its books and record depreciation expense over the asset’s useful life.
B.) The lessor will retain the asset on its books and record amortization expense over the asset’s useful life.
C.) The lessee will depreciate the asset over the lease term.
D.) The lessee will record amortization expense associated with the right-of-use asset over the asset’s useful life.
A.) The lessor will retain the asset on its books and record depreciation expense over the asset’s useful life.
Because the lease is an operating lease for the lessor, the lessor maintains the asset on its books and continues to depreciate it using an acceptable depreciation method.
Note: Though the lessee will record amortization of the right-of-use asset as a component of lease expense, the lessee will not explicitly record amortization expense. Also, the asset would be amortized over the shorter of the lease term or useful life. In this question, the lease term is shorter.
A lessor enters a sales-type lease with an unguaranteed residual. The lessor will record
A.) A credit to sales revenue for the fair value of the asset less the present value of the unguaranteed residual value.
B.) A credit to sales revenue for the fair value of the asset.
C.) A credit to sales revenue for the fair value of the asset less the gross amount of the unguaranteed residual value.
D.) A debit to lease receivable for the gross amount less the present value of the unguaranteed residual value.
A.) A credit to sales revenue for the fair value of the asset less the present value of the unguaranteed residual value.
The lessor will subtract the present value of the unguaranteed residual value from both the cost of goods sold (debit) and the sales revenue (credit).
Which of the following is not a benefit to the lessor?
A.) High residual value.
B.) Interest revenue.
C.) Tax incentives.
D.) Off-balance sheet financing.
D.) Off-balance sheet financing.
Off-balance sheet financing is not a benefit to the lessor.
Under the operating lease method, the lessee will depreciate the asset over the lease term if less than the economic life of the asset.
A.) True
B.) False
B.) False
Under the operating lease method, the lessor (not the lessee) depreciates the asset in the normal manner, with the depreciation expense of the period matched against the rental revenue.
In computing lease payments, the amount to be recovered by the lessor is the:
A.) fair market value of the leased asset less the present value of the asset’s residual value.
B.) cost of the leased asset less the asset’s residual value.
C.) cost of the leased asset less the present value of the asset’s residual value.
D.) fair market value of the leased asset less the asset’s residual value.
A.) fair market value of the leased asset less the present value of the asset’s residual value.
The amount to be recovered by the lessor through lease payments is the fair market value of the leased asset less the present value of the asset’s residual value.
A guaranteed residual value is the amount that the lessee agrees to pay to purchase the asset at the end of the lease term.
A.) True
B.) False
B.) False
If the lease includes a guaranteed residual value, the lessee agrees to make up any deficiency below a stated amount that the lessor realizes in residual value at the end of the lease term.
The methods of accounting for a lease by the lessee are
A.) operating and capital lease methods.
B.) operating, sales, and capital lease methods.
C.) operating and financing lease methods.
D.) none of these answers are correct.
C.) operating and financing lease methods.
The distinction, for the lessor, between a direct financing lease and a sales-type lease is the presence or absence of
A.) a bargain purchase option.
B.) an unguaranteed residual value.
C.) manufacturer’s or dealer’s profit.
D.) minimum lease payments.
C.) manufacturer’s or dealer’s profit.
Manufacturer’s or dealer’s profit indicates a sales-type lease as opposed to a direct financing lease.
Which of the following best describes current practice in accounting for leases?
A.) Leases similar to installment purchases are capitalized.
B.) Leases are not capitalized.
C.) All leases are capitalized.
D.) All long-term leases are capitalized.
D.) All long-term leases are capitalized.
The FASB has recently adopted an approach, which requires companies to capitalize all long-term leases.
In computing the present value of the minimum lease payments, 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.) none of these answers are correct.
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.
Which of the following is included in the minimum lease payment?
A.) Unguaranteed residual value.
B.) Maintenance costs.
C.) Executory costs.
D.) Bargain purchase option.
D.) Bargain purchase option.
If a bargain-purchase option exists, the lessee must increase the present value of the minimum lease payments by the present value of the option price.
If the residual value of a leased asset is guaranteed by a third party
A.) it is treated by the lessee as an additional lease payment.
B.) the third party is also liable for any lease payments not paid by the lessee.
C.) the net investment to be recovered by the lessor is reduced.
D.) the minimum lease payments of the lessee exclude the guarantee.
D.) the minimum lease payments of the lessee exclude the guarantee.
If the residual value of a leased asset is guaranteed by a third party, the minimum lease payments of the lessee exclude the guarantee.
The Lease Liability account should be disclosed as
A.) current portion in current liabilities and the remainder in noncurrent liabilities.
B.) deferred credits.
C.) all current liabilities.
D.) all noncurrent liabilities.
A.) current portion in current liabilities and the remainder in noncurrent liabilities.
