Chapter 15 ACT 2

The four criteria provided in GAAP for distinguishing a capital lease from an operating lease do not include: A. The agreement specifies that ownership transfers at the end of the lease term. B. The collectibility of the lease payments must be reasonably predictable. C. The agreement contains a bargain purchase option. D. The noncancelable lease term is 75% or more of the useful life of the leased asset.

B. The collectibility of the lease payments must be reasonably predictable.

On February 1, 2011, Pearson Corporation became the lessee of equipment under a five-year,noncancelable lease. The estimated economic life of the equipment is 8 years. The fair value of theequipment was $600,000. The lease does not meet the definition of a capital lease in terms of a bargainpurchase option, transfer of title, or the lease term. However, Pearson must classify this as a capitallease if the present value of the minimum lease payments is at least A.) $600,000. B.) $540,000. C.) $450,000. D.) $405,000.

B.) $540,000

When the total expenses over the life of an operating lease are compared to the total expenses over the life of a capital lease, one will find that: A.) The expenses of a capital lease are greater than the expenses of the operating lease. B.) The expenses of the capital lease and operating lease are equal. C.) The expenses of an operating lease are greater than the expenses of a capital lease. D.) No meaningful comparison can be made.

B.) The expenses of the capital lease and operating lease are equal.

Of the four criteria for a capital lease, the one that most often is the decisive criteria is: A. The 75% of economic life test. B. The transfer of title. C. The 90% of fair value test. D. The bargain purchase option.

C. The 90% of fair value test.

Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2016. The manufacturing cost of the computers was $12 million. This noncancelable lease had the following terms: • Lease payments: $2,466,754 semiannually; first payment at January 1, 2016; remaining payments at June 30 and December 31 each year through June 30, 2020. • Lease term: five years (10 semiannual payments). • No residual value; no bargain purchase option. • Economic life of equipment: five years. • Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually. • Fair value of the computers at January 1, 2016: $20 million. Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred. Technoid would account for this as: A.) A capital lease. B.) A direct financing lease. C.) A sales-type lease. D.) An operating lease.

C.) A sales-type lease.

Distinguishing between operating and capital leases is due in large part to the accounting concept of: A.) Conservatism. B.) Materiality. C.) Substance over form. D.) Historical cost.

C.) Substance over form

If the lessor records unearned rent at the beginning of a lease term, the lease must: A. Be a direct financing lease. B. Be a sales-type lease. C. Contain a bargain renewal option. D. Be an operating lease.

D. Be an operating lease.

On September 1, 2016, Custom Shirts Inc. entered into a lease agreement appropriately classified as an operating lease. The lease term is three years. The annual payments are (a) $20,000 for year 1, (b) $24,000 for year 2, and (c) $28,000 for year 3. How much rent expense will Custom Shirts recognize for 2016? A.) $6,667. B.) $24,000. C.) $20,000. D.) $ 8,000.

D.) $8,000