[SOURCE] Midterms

Question 1

5) Which statement is not true regarding initial direct costs incurred by the lessor?

a. In a direct financing lease, initial direct costs are added to the net investment in the lease.
b. In a sales-type lease, initial direct costs are expensed as a component of cost of goods sold.
c. In an operating lease, initial direct costs incurred by the lessor are deferred and allocated over the lease term.
d. In lessee accounting, initial direct costs is part of the right-of-use asset account at present value.

Answer 1

d. In lessee accounting, initial direct costs is part of the right-of-use asset account at present value.

Question 2

8) What is the treatment of an unguaranteed residual value in determining the cost of goods sold under a sales type lease?

a. The unguaranteed residual value is ignored.
b. The unguaranteed residual value is added to the cost of the underlying asset.
c. The unguaranteed residual value is deducted from the cost of the underlying asset at absolute amount.
d. The unguaranteed residual value is deducted from the cost of the underlying asset at present value.

Answer 2

d. The unguaranteed residual value is deducted from the cost of the underlying asset at present value.

Question 3

Net investment in a direct financing lease is equal to:

a. Cost of the asset
b. Cost of the asset plus initial direct costs paid to the lessor
c. Cost of the asset minus guaranteed residual value
d. Cost of the asset plus unguaranteed residual value

Answer 3

b. Cost of the asset plus initial direct costs paid to the lessor

Question 4

Which condition would require lease capitalization?

a. The lease does not transfer title to the lessee
b. There is an uncertain purchase option
c. The present value of the lease payments is less than 50% of the fair value of the asset
d. The lease term is a major part of the useful life of the asset

Answer 4

d. The lease term is a major part of the useful life of the asset