Select Transactions

Question 1

Research and development costs are identified in five categories:

Answer 1

(1) materials, equipment, and facilities; (2) personnel; (3) intangibles; (4) contract services; and (5) indirect costs.

Question 2

What are the established five criteria for classifying leases?

Answer 2

The first set of criteria result in a finance lease for a lessee or sales-type lease for the lessor if the lease meets any of the following criteria at commencement:

1.Title (ownership) transfers to the lessee by the end of the lease term.
2.The lease contains a purchase option that the lessee is reasonably certain to exercise.
3.The lease term is for the major part of the remaining economic life of the underlying asset. This criterion shall not be used if the lease commencement date is near the end of the asset’s economic life.
4. The present value of the sum of the lease payments and any lessee guaranteed residual value not already in the lease payments equals or exceeds substantially all of the fair value of the underlying asset.
5. The underlying asset is specialized and is not expected to have an alternative use to the lessor at the end of the lease term.

Question 3

What is lessee’s incremental borrowing rate?

Answer 3

The rate that the lessee would expect to pay a bank if funds were borrowed to buy (rather than lease) the asset.