Chapter 21 Lease Self-Assessment Quiz

Question 1

Minimum lease payments include both a guaranteed and an unguaranteed residual value.

True
False

Answer 1

False

Minimum lease payments do guaranteed residual value, but not unguaranteed residual value.

Question 2

Which of the following is included in the minimum lease payments?

Maintenance costs.

Unguaranteed residual value.

Executory costs.

Bargain purchase option.

Answer 2

Bargain purchase option.

Question 3

All of the following are disclosures required of the lessor except:

all of these answers are correct.

the components of the net investment in sales-type and direct financing leases as of each balance sheet date.

total contingent rentals included in income for each period for which an income statement is presented.

future minimum lease payments to be received for each of the five succeeding years.

Answer 3

all of these answers are correct.

Question 4

The Lease Liability account should be disclosed as

current portions in current liabilities and the remainder in noncurrent liabilities.

deferred credits.

all current liabilities.

all noncurrent liabilities.

Answer 4

current portions in current liabilities and the remainder in noncurrent liabilities.

Question 5

All of the following are disclosures required of the lessor except

The amount of lease revenues reported each period.

The payments to be received for each of the five succeeding years.

Amounts receivable and unearned revenues under lease agreements.

All of these answer choices are correct.

Answer 5

All of these answer choices are correct.

• General description of the nature of leasing arrangements.
• The nature, timing, and amount of cash inflows and outflows associated with leases, including payments to be paid or received for each of the five succeeding years.
• The amount of lease revenues and expenses reported in the income statement each period.
• Description and amounts of leased assets by major balance sheet classification and related liabilities.
• Amounts receivable and unearned revenues under lease agreements.

Question 6

The FASB requires lessees and lessors to disclose certain information about leases in their financial statements or in the notes.

True
False

Answer 6

True

Question 7

To avoid leased asset capitalization, companies can devise lease agreements that fail to satisfy any of the four leasing criteria. Which of the following is not one of the ways to accomplish this goal?

Write in a bargain purchase option.

Use a third party to guarantee the asset’s residual value.

Set the lease term at something less than 75% of the estimated useful life of the property.

Lessee uses a higher interest rate than that used by lessor.

Answer 7

Write in a bargain purchase option.

1. Ensure that the lease does not specify the transfer of title of the property to the lessee.
2. Do not write in a bargain-purchase option.
3. Set the lease term at something less than 75 percent of the estimated economic life of the leased property.
4. Arrange for the present value of the minimum lease payments to be less than 90 percent of the fair value of the leased property.

Question 8

Recognition of a gain or loss on the sale-leaseback transaction by the seller-lessee depends on whether or not the seller-less will continue to use the asset after the sale or gives up the right to use the asset.

True
False

Answer 8

True

The seller-lessee should recognize a gain or loss on the transaction if the right to use the asset is given up, but not if the asset will continue to be used after the sale.

Question 9

In a sale-leaseback transaction, if the lease term is 75% or more of the economic life of the asset, with no bargain purchase option or title transfer, the seller-lessee accounts for the transaction as a sale and the lease as a capital lease, and amortizes the profit from the sale over the economic life of the asset.

True
False

Answer 9

False

In a sale-leaseback transaction, if the lease term is 75% or more of the economic life of the asset , the seller-lessee accounts for the transaction as a sale and amortizes the profit from the sale over the lease term.

Question 10

In a sale-leaseback transaction, if the lease includes a bargain purchase option, the seller-lessee accounts for the transaction as a sale and the lease as a capital lease, and amortizes the profit from the sale over the lease term.

True
False

Answer 10

False

In a sale-leaseback transaction, if the lease includes a bargain purchase option, the seller-lessee accounts for the transaction as a sale are amortizes the profit from the sale over the economic life of the asset.

Question 11

All of the following statements about lease accounting under IFRS are true except:

The IFRS leasing standard is IAS 17, first issued in 1982.

IFRS requires a year-by-year breakout of payments related to leasing arrangements.

IFRS is more general in its lease accounting provisions than is U.S. GAAP.

The IFRS leasing standard, IAS 17, is the subject of only three interpretations.

Answer 11

IFRS requires a year-by-year breakout of payments related to leasing arrangements.

Although some international companies provide a year-by-year breakout of payments due in years 1 through 5, IFRS does not require it.

Question 12

In general, IFRS accounting on leases is more detailed and prescriptive than the corresponding U.S. GAAP on leases.

True
False

Answer 12

False

Question 13

Which of the following statements is true when comparing the accounting for leasing transactions under U.S. GAAP with IFRS?

IFRS requires that companies provide a year-by-year breakout of future noncancelable lease payments due in years 1 through 5.

IFRS for leases is more “rules-based” than U.S. GAAP and includes many bright-line criteria to determine ownership.

The IFRS leasing standard is the subject of over 30 interpretations since its issuance in 1982.

IFRS does not provide detailed guidance for leases of natural resources, sale-leasebacks, and leveraged leases.

Answer 13

IFRS does not provide detailed guidance for leases of natural resources, sale-leasebacks, and leveraged leases.

Question 14

Which of the following is one of the criteria for recording a lease as a finance lease, under IFRS?

The present value of the minimum lease payments amounts to 75% of the fair value of the leased asset.

The lease doesn’t contain a bargain-purchase option.

The lease term is for the major part of the economic life of the asset.

The lease must be cancelable.

Answer 14

The lease term is for the major part of the economic life of the asset.

Question 15

Which of the following statements is true?

IFRS has an additional lessor criterion for capitalization that collectability of the payments required from the lessee is reasonably predictable.

Under IFRS, in computing the present value of the minimum lease payments, the lessee is required to use the incremental borrowing rate.

Operating leases under GAAP are referred to as finance leases under IFRS.

IFRS is more general in its provisions for determining if a lease arrangement transfers the risks and rewards of ownership.

Answer 15

IFRS is more general in its provisions for determining if a lease arrangement transfers the risks and rewards of ownership.

Question 16

The methods of accounting for a lease by the lessee are

none of these answers are correct.

operating and capital lease methods.

operating, sales, and capital lease methods.

operating and financing lease methods.

Answer 16

operating and capital lease methods.

Question 17

A lessee records interest expense in both a capital lease and an operating lease.

True
False

Answer 17

False

Question 18

A benefit of leasing to the lessor is the return of the leased property at the end of the lease term.

True
False

Answer 18

True

Question 19

Lessees prefer to account for their leases as operating lease because:

it increases the amount of total assets.

it decreases the amount of liability reported.

it increases their debt to total equity ratio.

it decreases the income tax expense.

Answer 19

it decreases the amount of liability reported.

Question 20

The total charges to operations over the lease term are

greater for a capital lease than an operating lease.

less for a capital lease than an operating lease.

the same for a capital lease as an operating lease.

not comparable between a capital lease and an operating lease.

Answer 20

the same for a capital lease as an operating lease.

while the total charges to operations are the same over the lease term whether accounting for the lease as a capital lease or as an operating lease, under the capital lease treatment the charges are higher in the earlier years and lower in the later years.

Question 21

A lease that transfers the benefits and risks of ownership should be classified as an operating lease.

True
False

Answer 21

False

When ownership benefits and risks are transferred the lease should be capitalized.

Question 22

Under the operating method, the lessor records each rental receipt as part interest revenue and part rental revenue.

True
False

Answer 22

False

Question 23

Direct-financing leases are in substance the financing of an asset purchase by the lessee.

True
False

Answer 23

True

Question 24

In a lease that is appropriately recorded as a direct-financing lease by the lessor, interest income

should be recognized over the period of the lease using the straight-line method.

should be recognized over the period of the lease using the effective interest method.

should be recognized at the lease’s expiration.

does not arise.

Answer 24

should be recognized over the period of the lease using the effective interest method.

Question 25

The lessor expenses initial direct costs in the year of incurrence in a(n):

sales-type lease.
operating lease.
direct financing lease and sales-type lease.
direct financing lease.

Answer 25

sales-type lease.

Question 26

Which one of the following amounts would differ in a sales-type lease with an unguaranteed residual value instead of a guaranteed residual value?

None of these answers are correct.

Gross profit.

Lease receivable.

Sales price of the asset.

Answer 26

Sales price of the asset.

Question 27

The primary difference between a direct-financing lease and a sales-type lease is the manufacturer’s or dealer’s gross profit (or loss).

True
False

Answer 27

True

Question 28

The primary difference between a direct-financing lease and a sales-type lease is the

allocation of initial direct costs by the lessor to periods benefited by the lease arrangements.

amount of the depreciation recorded each year by the lessor.

manner in which rental receipts are recorded as rental income.

recognition of the manufacturer’s or dealer’s profit at (or loss) the inception of the lease.

Answer 28

recognition of the manufacturer’s or dealer’s profit at (or loss) the inception of the lease.

Question 29

If the residual value of a leased asset is guaranteed by a third party

it is treated by the lessee as no residual value.

it is treated by the lessee as an additional payment and by the lessor as realized at the end of the lease term.

the third party is also liable for any lease payments not paid by the lessee.

the net investment to be recovered by the lessor is reduced.

Answer 29

it is treated by the lessee as no residual value.

Question 30

The present value of the unguaranteed residual value is excluded in the calculation of the minimum lease payments for the lessee, but included when calculating depreciation expense.

True
False

Answer 30

False

Question 31

When the lessee agrees to make up any deficiency below a stated amount that the lessor realizes in residual value, that stated amount is the guaranteed residual value.

True
False

Answer 31

True

Question 32

From the lessee’s viewpoint, an unguaranteed residual value is the same as no residual value in terms of computing the minimum lease payments.

True
False

Answer 32

True