F6

Question 1

A reasonable minimum threshold that the lease term is greater than or equal to…… Percent of the economic life of the leased asset? Also known as a “major part” of the assets economic life.

1. 75%
2. 80%
3. 51%
4. 90%

Answer 1

75%

Question 2

To consider the fair value of the leased asset and considered for the lease a finance lease it must be at least ……percent

Answer 2

90%

Question 3

What is OWNES mean?

Answer 3

Ownership transfers at end of lease
Written option to purchase
Net present value over threshold to equal fair value: 90%
Economic life of asset: 75%
Equipment is specialized

Question 4

Abe sold its headquarters building at a gain, is simultaneously lease back the building. The lease was reported as a financial lease under US gap. At the time of sale, the sale leaseback will be considered:

1. A separate component of stockholders equity
2. A reduction of lease expense
3. Operating income
4. A failed sale

Answer 4

4. A failed sale

(If the underlying lease is a sale leaseback is a finance lease, it is considered equivalent to a re-purchase and will therefore be considered a “failed sale.”)

Question 5

Under US GAAP, in a sales lease back transaction the fair value of the property at the time of a lease back that is less than book value means a ……… Must be recognized immediately?

Answer 5

A loss in the current year must be recognized immediately

Question 6

Assuming that no direct costs are involved, what are the components of the lease receivable for a lessor involved in a direct financing lease?

1. The minimum lease payments less executory cost
2. The minimum lease payments less residual value
3. The minimum lease payments plus residual value
4. The minimum lease payments plus in any executory cost

Answer 6

3. The minimum lease payments plus residual value

(The reason for this is because the less sore can also expect to collect this residual value from the lessor at the cumination of the lease).

Question 7

When there is a transfer of title included in lease agreement, would the lessor record depreciation expense on the least asset and interest revenue?

Answer 7

NO for depreciation expense &

YES for interest expense

(Due to the transfer of title the less he will incur both depreciation and interest expense.
The Le or will earn in book interest income women the payments from the lessee are received and remove asset from books at inception of lease

Question 8

On February 1, a company enters into a operating lease for office space and receives control for the property to make a leasehold improvements. The company begins alterations to the property on March 1 and the companies staff moves into the property on May 1. The monthly lease payments begin on June 1. The recognition of lease expense for the new offices should begin in which of the following months?

1. June
2. May
3. March
4. February

Answer 8

4. February

(The lessee should begin the recognition of lease expenses for the new office in February, as this is the commitment date. The commencement date is the date the ass it is made available for lessee for use).

Question 9

Which of the following statements regarding the lessor accounting under an operated least is most accurate?

1. Any applicable impairment charges to the least asset will be booked by the lessee
2. A refundable security deposit is booked as a liability until refund it to the lessee
3. Depreciation is both over the life of the lease
4. Income earned over the life of the lease is part interest and part principle

Answer 9

2. A refundable security deposit is booked as a liability until refund it to the lessee

(Typically book the deposit as a liability until the point it is returned to the lessee typically at the end of the lease).

Question 10

 For an operating lease, when it comes to increases in the annual payments, how much can payments increase?

Answer 10

No change to lease expense or interest

Question 11

In order to record a financing liability, one must record the difference between the fair value and the………?

1. Present value
2. Book value
3. Sell price
4. Cost price

Answer 11

Sell price

(Difference between sale price and fair value is recorded out of a financing liability on the books of the seller/lessee).

Question 12

Been owns and manages 19 apartment complexes. On signing a lease, each tenant must pay the first and last months rent and a $600 refundable security deposit. The security deposits are rarely refunded in total, because cleaning cost of $180 per apartment are almost always deducted. About 30% of the time, the tenants are also charged for damages to the apartment, which typically cost $100 to repair. If a one-year lease is signed on a $100 per month apartment, what amount would Ben report as refundable security deposit?

1. $1,600
2. $420
3. $600
4. $390

Answer 12

3. $600

(The entire 600 is recorded as a refundable security deposit. If the tenant moves out at the end of the lease term, the deposit is taken into revenue and match with the cleaning cost and damage repair and or refund it to the tenant. The deposit is not receipt

Question 13

Elise is classified as a finance lease because it contains a room purchase option that the lessee is responsibly certain to exercise. Over what period of time should the lessee amortize the least property?

1. The term of lease
2. The lease term or economic life of the asset, whichever is shorter.
3. The economic life of asset
4. The economic life of the asset, not to exceed 40 years.

Answer 13

3. The economic life of the lease

(With the finance lease, the lessee should advertise the least property over the economic life of the asset one when there is a written purchase option or when the lessee takes ownership of asset at the end of the term lease).

Question 14

If a third-party has guaranteed to pay a residual amount at the end of lease to lessor, would the amount be included in the calculation of the lease obligation that the lessee has to pay?

Answer 14

No, if a third-party is paying for the residual value at the end of the lease and then it would not be included in calculation of the lease obligation only way it could be included is if the lessee was paying

Question 15

In the year in Palace of the less of the the principal amount of the lease obligation should be equivalent to the present value of an ordinary an annuity of $1 at:

10% return on the lease
12% incremental borrowing rate

Answer 15

10% return on the lease

(Lessee should use the rate implicit in the lease (if known by the lessee) to discount cash flows.

Question 16

A lessee had a 10-year finance lease requiring equal annual payments. The reduction of the lease liability in Year 2 should equal:

1. One-tenth of the original lease liability
2. The reduction of the lease obligation in Year 1
3. The current liability shown for the lease at the end of Year 1.
4. The current liability shown for the lease at the end of Year 2.

Answer 16

3. The current liability shown for the lease at the end of Year 1.

(finance leases should we record it as both an asset and liability at the present value of the minimum lease payments. The asset is depreciate it. The liability is amortize using the interest method. Each payment is allocated between principal and interest. The liability is reduced by the amount of principal reduction. The reduction in the lease liability shares equal to the current liability at the end of the previous year.

Question 17

The rate to use to calculate present value is the leases “………………..” if known by the lessee.

Answer 17

Implicit rate

Question 18

Bessie contractors least a new piece of equipment. The lease is for three years in the economic life of the equipment is four years. At least contains a written purchase option which Bessie intends to exercise. Over how many years shit busy depreciate the least equipment?

1. The equipment should not be depreciated
2. 3
3. 4
4. 2

Answer 18

3. 4

(Since Bessie has the written purchase option can be exercised along with the lease being 75% of the economic life of equipment busy depreciate asset over the entire four years).

Question 19

Oak least equipment for its entire Nayeer useful life, agreeing to pay $50,000 at the start of the lease term on December 31, your room, and $50,000 annually on each December 1 for the next eight years. The present value on December 31, you’re one, of the Nite lease payments over the lease term, using the rate implicit in the least which Oak knows to be 10%, was $345,600. The December 31, year one, present value of the lease payments using Oaks in her incremental borrowing rate of 12% was $298,000. Oak made a timely second lease payment. What amount should Oak report as a lease liability and it’s December 1, year 2, balance sheet?

1. $390,000
2. $295,600
3. $0
4. $275,160

Answer 19

4. $275,160

(345,600 - 50,000 = 295,600
50,000 - 29,560(295,600 x .10) = 20,440

295,600 - 20,440 = $275,160

Question 20

Steam acquire equipment under a financial lease for six years. Minimum lease payments were $60,000 payable and only at your end. The interest-rate was 5% within the new ED factor of six years of five. 0757. The present value of the payment was equal to the fair value amount of the appointment. What amount should Steam report as interest expense?

1. 15,227
2. 18,000
3. 3,000
4. 0

Answer 20

15,227

(60,000 x 5.0757 annuity factor) = 304,542 x 5% (interest rate) = $15,227

Lease liability is calculated as the minimum lease payment times the annuity factor, not the minimum lease payment time is the number of years

Question 21

Capitalize equipment should be depreciated in accordance with the lessee’s normal depreciation policy, not to extend estimating its for life, unless the lease ………. transfer ownership or contain a bargain purchase option, in which case the shorter lease should be used

Answer 21

Does not

Question 22

At the beginning of year 2 Kennedy enthuss into a four year operating lease with payments due at the end of the year beginning on December 31, year too. The rate implicit in the lease is 4.5% and Kennedy will owe annual payments of $5200. The present value of a ordinary annuity for four years at 4.5% is equal to 3.5875.
The caring value of the ROU asset at the end of year 2 will be closest to:

1. 18,655
2. 14,295
3. 9,740
4. 13,455

Answer 22

2. 14,295

(5,200 x 3.5875 = 18,655
18,655 x 4.50% (0.045) = 839.475
5,200 - 839 = 4,361)
18,655 - 4,361 = 14,295

Question 23

Amortization of leasehold improvement should be over the life of the improvements or the remaining life of the lease. Which one would it be?

Answer 23

Whichever is shorter

Question 24

Oak leased equipment for its entire nine-year useful life, agreeing to pay $50k at the start of the lease turn on December 31, year 1, and $50k annually on each December 31 for the next eight years. I’ll pay $3000 in initial direct cost at least inception. The present value on December 31, your one, of the nine lease payments over the lease term, using the rate implicit in the lease which Oak Knolls to be 10% was $316,500. On December 31, Year 1, the present value of the lead patients using Oak’s incremental borrowing rate of 12 percent was $298,500. Oak accounts for the finance lease under GAAP and uses straight-line depreciation. What amount should Oak report as ROU asset on its December 31, Year 2, balance sheet?

1. 284,000
2. 265,333
3. 319,500
4. 281,333

Answer 24

1. 284,000

319,500/9 = 35,500

319,500 -35,500 = 284,000

Question 25

On December 30, Year 1, Rafferty Corp. leased equipment under a finance lease. Annual lease payments of $20k are due December 31 for 10 years. The equipment’s useful life is 10 years, and the interest rate implicit in the lease is 10%. The finance lease obligation was recorded on December 30 Year 1, at $135k, and the first lease payment was made on that date. What amount should Rafferty include in current liabilities for this finance lease in its December 31, Year balance sheet?

1. 20,000
2. 8,500
3. 11,500
4. 6,500

Answer 25

8,500

135,000 - 20,000 = 115,000
20,000 - 11,500 (10% x 115,000) = 8,500

115,000 - 8,500 = 106,500

Question 26

Star Co. Leases a building for its product showroom. The 10-year non renewable lease will expire on December 31, Year 10. In January Year 5, Star redecorated its showroom and made leasehold improvements of $48,000. The estimated useful life of the improvements is 8 years. Star uses the straight-line method of amortization. What amount of leasehold improvements, net of amortization, should Star report in its June 30, Year 5, balance sheet?

1. 45,000
2. 45,600
3. 43,200
4. 44,000

Answer 26

4. 44,000

(Leasehold improvements should be amortized over the lesser of the remaining life of the lease (6 years), life of improvement (8 years). $48,000/6 = $8,000 amortization for a year or $4,000 for January Year 5 through June 30, Year 5. $48,000 - $4,000 = $44,000)

Question 27

On June 1 of the current year, a company entered into a real estate lease agreement for a new building. The lease is an operating lease and is fully executed on that day. According to the terms, of the lease, payments of $28,900 per month are scheduled to begin on October 1 of the current year and to continue each month thereafter for 56 months. The lease term spans five years. The company has a company Year end. What amount is the company’s lease expense for the current calendar year?

1. 161,838
2. 188,813
3. 86,700
4. 202,300

Answer 27

2. 188,813

(28,900 x 56 = 1,618,400/60 =26,973

26,973 x 7 = 188,813

If free or reduced rent is part of the lease package, the lessee must takes the total lease expense to be paid for entire term of the lease and digit it evenly over each period

Question 28

Farm Co leased equipment to Union Co. on July 1, Year 1, and property recorded the sales-type (finance) lease at $135,000, the present value of the lease payments discounted at 10%. The first of eight annual lease payments of $20,000 due at the beginning of each year was received and recorded on July 3, Year 1. Farm has purchased the equipment for 110,000. What amount of interest revenue from the lease should Farm report in its Year 1 income statement?

1. 0
2. 5,750
3. 5,500
4. 6,750

Answer 28

2. 5,750

(The initial lease receivable equals $135,000. After the first lease payment is received two days later, the lease receivable equals $115,000 ($135,000 less $20,000). Year 1 interest revenue equals $5,750 ($115,000 x 10% x 6/12)).

Question 29

In a finance lease, the difference between fair value of the leased asset and cost at inception is recognized as a ………….

Answer 29

Gain or loss

Question 30

Unearned interest revenue in a sales -type lease is amortized over the period of the lease using the …………. Method

Answer 30

Interest

(3,520,000. PV inception
-600,000. Less initial payment
2,920,000. Balance during year 1
x. 10%. Interest rate
292,000. Interest rev for whole year
x. 1/2. year. Adjust for half year
146,000. Interest revenue at 12/31

Question 31

When leases are involved with interest, which PV would you use to calculate balance sheet at lease inception?

1. Present value of $1 at 6%
2. Present value of an annuity due at 6%
3. Present value of an ordinary annuity at 6%

Answer 31

2. Present value of an annuity due at 6%

Question 32

Fair value here gains and losses are recorded on the income statement, while cash flow hedge gains and losses are recorded as a component of other …………..?

Answer 32

Other comprehensive income

Question 33

In order for a financial instrument to be a derivative for accounting purposes, the financial instrument must:

1. Have one or more underlying
2. Require an initial net investment
3. Only 1
4. Only 2
5. Neither 1 or 2
6. Both 1 & 2

Answer 33

1. Only 1

(Current accounting standards defined derivatives for accounting purposes as having one or more underlines and as not requiring an initial investment).

Question 34

With regard to a fair value hedge, hedge effectiveness is a measure of the extent to which the:

1. Actual change in the hedges fair value corresponds to the expected change in the hedges fair value.
2. Hedge transaction results in eliminating changes in fair value of the hedged item.
3. Cash flows from the hedge transaction offset cash flows from the hedges risk
4. Hedge transaction offsets the exposure to changes and the hedged items fair value

Answer 34

4. Hedge transaction offsets the exposure to changes and the hedged items fair value

Question 35

Which of the following risks are inherent in an interest rate swap agreement?

I. The risk of exchanging a lower interest rate for a higher interest rate

II. The risk of non-performance by the counterparty to the agreement

1. Only 2
2. Only 1
3. Both 1 & 2
4. Neither 1 nor 2

Answer 35

3. Both 1 & 2

(It’s a financial instrument that is both contractual right and a contractual obligation to both parties. Such an agreement has an off balance sheet risk of accounting loss resulting from both credit and market risk. Credit risk results from the risk of non-performance by the counter-party to the agreement (option 2). Market risk is the risk of exchanging a lower interest rate for a higher interest rate (option 1). Thus, both risks 1 and 2 are inherent in interest rate swap agreements.

Question 36

Which of the following should be reported in a stockholders’ equity contra account?

1. Organization costs
2. Premium on convertible bonds that are common stock equivalents
3. Cumulative foreign exchange translation loss
4. Discount on convertible bonds that are common stock equivalents.

Answer 36

3. Cumulative foreign exchange translation loss

(Translation adjustments are not included in determining net income for the period but are disclosed and accumulated as a component of other comprehensive income in consolidated equity until sale or until liquidation of the investment takes place).

Question 37

A company from the United Kingdom uses British pounds in its normal operations, reports in the European Union and euros., And reports in the United States in US dollars. The company is owned by a private equity firm in Japan. What is the companies functional currency?

1. The British pound
2. The Japanese yen
3. The U.S. dollar
4. The euro

Answer 37

1. The British pound

(Functional currency is the currency of the primary economic environment in which the entity operates, usually the local currency or the reporting currency).

Question 38

When it comes to translation of common stock/APIC under both the all-current method and the temporal method. Which exchange rate would be used?

1. Current rate
2. Historical rate
3. Average rate
4. Inventory (FIFO)

Answer 38

3. Historical rate

Question 39

When it comes to translation of assets and liabilities on the balance sheet. Which exchange rate would be used?

1. Current rate
2. Historical rate
3. Average rate
4. Inventory (FIFO)

Answer 39

1. Current rate

Question 40

When it comes to translation of to remeasure inventory on the balance sheet and cost of goods sold on the income statement of the temporal method was used. Which exchange rate would be used?

1. Current rate
2. Historical rate
3. Average rate
4. Inventory (FIFO)

Answer 40

4. Inventory (FIFO)

Question 41

Gordon Ltd., a 100% owned British subsidiary of a U.S. parent company, reports it’s financial statements in local currency, the British pound. A local newspaper published the following U.S. exchange rates to the British pound at year end:

Current rate $1.50
Historical rate (acquisition). 1.70
Average rate. 1.55
Inventory (FIFO). 1.60

Which currency rate should Gordon use to convert its income statement to U.S. dollars at year end?

1. 1.50
2. 1.60
3. 1.70
4. 1.55

Answer 41

4. 1.55

Question 42

Under U.S. GAAP, in preparing consolidated financial statements of a U.S. parent company with a foreign subsidiary, the foreign subsidiary’s functional currency is the currency:

1. Of the environment in which the subsidiary primarily generates and expands cash
2. Of the country in which the parent is located
3. Of the country in which the subsidiary is located
4. In which the subsidiary maintains its accounting records

Answer 42

1. Of the environment in which the subsidiary primarily generates and expands cash

(for functional currency of a company it could be the foreign entities local currency in which they keep they are books, currency in which financial statements will be present it which is the currency of the parent company or, foreign currency other than the one in which the foreign entity maintains its books).