Accounting Chapter 20 Leases

​Under the present value test, the FASB uses 90% as the guideline to determine if the present value of the lease payments is reasonably close to the fair value of the asset guaranteed residual value. True or False

False- the present value of the guaranteed residual value is included in the calculation of the minimum lease payments

A lessor defers the initial direct costs and amortizes them as expenses over the term of the lease for which type of lease? Operating or Sales-type

Operating

In an operating lease, the lessee reports interest on the lease liability as part of the lease expense. True or False

True

The FASB determined that the right to control the asset involves the right a.to direct the use of the identified asset. b.to obtain substantially all the economic benefits from the use of the identified asset and the right to direct the use of the identified asset. c.to obtain substantially all the economic benefits from the use of the identified asset. d.to obtain substantially all the economic benefits if the other party has the rights to a significant portion of the potential economic benefits.

b. to obtain substantially all the economic benefits from the use of the identified asset and the right to direct the use of the identified asset.

Which of the following statements is true? a.For an operating lease, the lease reports interest expense on the lease liability and amortization expense on the right-of-use asset. b.For a financing lease, the lease reports a single lease expense amount on a straight-line basis over the lease term. c.For an operating lease, the lease reports a single lease expense amount on a straight-line basis over the lease term. d.A lease that does not transfer substantially all the risks and benefits of ownership is a finance lease.

c. For an operating lease, the lease reports a single lease expense amount on a straight-line basis over the lease term. (For an operating lease, the lease reports a single lease expense amount on a straight-line basis over the lease term, which is comprised of interest and amortization expense.)

Which of the following is not a disclosure requirement for a finance lease? a.Gross amount of assets recorded under capital leases by major classes according to nature or function b.Total of minimum sublease rentals to be received in the future under noncancelable subleases c.The total of minimum rentals to be received in the future under noncancelable subleases d.Assets, accumulated depreciation, depreciation expense, and liabilities

c. The total of minimum rentals to be received in the future under noncancelable subleases (The total of minimum rentals to be received in the future under noncancelable subleases is a disclosure requirement for operating leases, not finance leases.)

​The lease classification tests for the lessor differ from the tests used by the lessee to determine the classification of a lease as a financing or operating lease under the present value test. True or False

False- The lease classification tests for the lessor are all identical to the tests used by the lessee to determine the classification of a lease as a financing or operating lease.

If the leaseback is classified as a finance lease, it's called a financing transaction or failed sale. True or False

True

​The FASB has adopted the approach that all leases should be capitalized. True or False

False- All long-term leases that have a lease term greater than 12 months should be capitalized.

​Leasing gives protection against obsolescence for the lessor which is considered as an advantage. True or False

False- An advantage of leasing for the lessee is protection against obsolescence, the risk of the asset becoming obsolete is borne by the lessor during all periods of the lease agreement.

A lease that does not transfer substantially all the risks and benefits of ownership is a(n) a.operating lease. b.minimum lease. c.finance lease. d.specialized lease.

a. operating lease. (A lease that does not transfer substantially all the risks and benefits of ownership is an operating lease. An operating lease gives a lessee the temporary right to use the underlying asset but not the effective control of the asset itself.)

Which of the following is an advantage of leasing from a lessee's viewpoint? a.The lease is a way of indirectly making a sale. b.Off-balance-sheet financing may be avoided. c.The asset can be acquired without having to make a substantial down payment. d.The risk of obsolescence may be increased.

c. The asset can be acquired without having to make a substantial down payment.

Direct financing lease differs from the sales-type lease in: A- The amount of depreciation recorded yearly by the lessor. B- The profit is deferred and recognized over the life of the lease. C- The residual value is guaranteed by the lessee. D- Leases that do not meet any of the classification tests are generally recorded as operating leases.

B- The profit is deferred and recognized over the life of the lease (The basic difference between a direct financing lease and a sales-type lease relates to the profit on the sale. In a sales-type lease, the profit is recognized immediately. In a direct financing lease, the profit is deferred and recognized over the life of the lease.)

​Under a sale-leaseback, if the buyer controls the asset the seller records a sale and recognizes a gain or loss. True or False

True

If it is probable that the expected residual value is equal to or greater than the guaranteed residual value, the lessee should not include the guaranteed residual value in the computation of the leased liability. True or False

True - If it is probable that the expected residual value is equal to or greater than the guaranteed residual value, the lessee should not include the guaranteed residual value in the computation of the leased liability, While if it is probable that the expected residual value is less than the guaranteed residual value, the difference between the expected and guaranteed residual values should be included in the computation of the lease liability.

If a lessor records a lease as a direct-financing lease, it classifies cash receipts on the statement of cash flows as a a.cash outflow in the investing activities section. b.cash inflow in the financing activities section. c.cash inflow in the operating activities section. d.cash outflow in the operating activities section.

c. cash inflow in the operating activities section.

In a sale-leaseback transaction, The gain or loss should be recognized by the seller-lessee when the lease is classified as a(n): A- Finance Lease B- Operating Lease C- Sales-type lease D- (a) & (b)

B- Operating Lease

Which of the following is considered one of the commonly discussed advantages of a lease for the lessor? A. It can provide a high residual value to the lessor upon return of the property. B. Leasing permits 100% financing at fixed rates. C. Leasing permits changes in equipment more easily thus reducing the risk of obsolescence. D. The control over the leased assets remains with the lessor since the lessor is still the owner of the asset.

A. It can provide a high residual value to the lessor upon return of the property.

Donald Company leased equipment to Trayant Company on July 1, 2012, for a non-cancelable, ten-year period expiring June 30, 2022 (Donald and Trayant both have a year-end of December 31). Equal annual payments under the lease are $70,000 and are due on July 1 of each year. The first payment was made on July, 1 2012. The implicit interest rate contemplated by Donald and Trayant is 8%. The carrying value of the equipment on Donald's accounting records was $500,000; and there is a guaranteed residual value of $25,000 (which is less than the expected residual value of the equipment at the end of the lease). The present value factor of an annuity due of $1 at 8% is 7.24689 and the present value factor of $1 discounted at 8% is 0.46319. Donald classifies the lease as: A- Operating lease B- Sales-type lease C- Finance lease D- Direct financing lease

B- Sales-type lease - It passed the Present Value Test and Donald is the Lessor

All of the following lease arrangements may be accounted for as an operating lease by the lessee, except: A. The present value of the minimum lease payments is $48,500 and the fair value of the leased property is $70,000. B. The lease agreement term is 3 years and the economic life of the leased property is 4 years. C. The lessee is given the option to renew the agreement. D. The lease contains no renewal options.

B. The lease agreement term is 3 years and the economic life of the leased property is 4 years

​All of the following lease arrangements should be accounted for as a finance lease by the lessee except: A. The lease agreement allows the lessee the right to purchase the leased asset of fair market value of $68,000 at a price of $6,000 at the end of the lease term. B. The present value of the minimum lease payments is $23,900 and the fair value of the leased property is $25,200. C. The lessee enters into a two-years agreement to lease a brand new truck of a ten years useful life. D. The lease agreement term is 8 years and the economic life of the lease property is 10 years.

C. The lessee enters into a two-years agreement to lease a brand new truck of a ten years useful life.

​The lessee should compute the present value of the payments under the present value test using the lessor's implicit interest rate, or: A. The incremental borrowing rate when it is double the implicit rate. B. If the implicit interest rate is not known, the agreement will be cancelled. C. The incremental borrowing rate upon the lessor's request. D. The lessee's incremental borrowing rate when the lessor implicit rate can't be determined.

D. The lessee's incremental borrowing rate when the lessor implicit rate can't be determined.

A lease conveyance is described by all of the following, except: A. lessor conveys less than his or her total interest in the property. B. A transfer of control of an asset to the lessee. C. The transfer of ownership from one party to another. D. A lessor agrees to transfer the right-to-use asset to the lessee

C. The transfer of ownership from one party to another. -A lease is a contractual agreement conveying the rights to use property from one party to another. A lease does not by definition transfer ownership. Such arrangements can be written into a lease agreement, but the transfer of ownership is not part of all lease agreements.

In accounting for sales-type lease, when payments by the lessee are determined as not probable, then A- Both parties record the lease as an operating lease. B- The lessor records a receivable and derecognizes the leased asset and makes a disclosure as to the improbability of payments. C- The lessor does not record a receivable and does not derecognize the leased asset, and the lease agreement is canceled. D- The lessor does not record a receivable and does not derecognize the leased asset, but instead records any receipt of lease payments as a deposit liability.

D- The lessor does not record a receivable and does not derecognize the leased asset, but instead records any receipt of lease payments as a deposit liability.

Which of the following approaches of the capitalization of leases has been adopted by the FASB? A. Capitalize all leases. B. Capitalize firm leases where the penalty for nonperformance is substantial. C. Do not capitalize any leased assets. D. Capitalize all long-term leases.

D. Capitalize all long-term leases.

​Which of the following is one of the advantages of leasing for the lessee? A. It often provides profitable interest margins. B. Residual values at the end of the lease can sometimes provide large profits. C. Leasing improves financial ratios by increasing assets without a corresponding increase in debt. D. Lease agreements may contain less restrictive provisions than other debt Agreements.

D. Lease agreements may contain less restrictive provisions than other debt Agreements.

A bargain purchase option and a guaranteed residual value of identical amounts and circumstances are similar in all accounting treatments except for the computation of the annual interest expense. True or False

False

​The presence of a bargain purchase option is the only criteria considered by the lessee to decide whether to classify and account for the arrangement as a finance lease. True or False

False

A transfer of ownership of an asset from one party to another party in a contractual agreement is the definition of a Lease. True or False

False- A lease is a contractual agreement conveying the rights to use an asset from one party (lessor) to another (lessee). A transfer of ownership can be written into a lease agreement but it's not a part of all lease agreements.

A lessee does not include an unguaranteed residual value in the computation of the lease liability in an operating Lease but includes it in the computation of the lease liability in a finance lease. True or False

False- A lessee does not include an unguaranteed residual value in the computation of the lease liability, whether it is a finance lease or an operating Lease.

For leases classified as operating, the lessee records a right-of-use asset and interest expense at the commencement of the lease, similar to the finance lease approach. True or False

False- At commencement date, the lessee records a right-of-use asset and lease liability in accounting for operating lease similar to finance lease. At the commencement date, no time has elapsed for interest to be incurred.

In a sale-leaseback arrangement, a company (the seller-lessee) transfers an asset to another company (the buyer-lessor) and then leases that asset back from the buyer-lessor under a finance lease. True or False

False- In a sale-leaseback arrangement, a company (the seller-lessee) transfers an asset to another company (the buyer-lessor) and then leases that asset back from the buyer-lessor under an operating lease.

In a short-term lease, the lessee can only expense the lease payments as incurred. True or False

False- In a short-term lease, the lessee may choose to record the right-of-use asset and lease liability or to expense the lease payments as incurred.

Initial direct costs are incremental costs of a lease that would not have been incurred had the lease been executed are included by the lessee in the cost of the right-of-use asset and recorded as part of the lease liability True or False

False- Initial direct costs incurred by the lessee are included in the cost of the right-of-use asset but are not recorded as part of the lease liability because they are already paid.

Lease prepayments made by the lessee and lease incentives paid by the lessor to the lessee decrease the right-of-use asset. True or False

False- Lease prepayments made by the lessee increase the right-of-use asset and lease incentives paid by the lessor to the lessee decrease the right-of-use asset

​Executory costs such as property taxes paid by the lessee directly to the tax authority should be included in the lease payments for purposes of measuring the lease liability. True or False

False- Payments by the lessee that are not included in the fixed lease payments required by the lessor and made directly to a third party are considered variable payments that should not be included in the lease payments for purposes of measuring the lease liability and are expensed when incurred.

​The lessee includes the full amount of a guaranteed residual value at the end of the lease term for the present value test and to capitalize lease liability. True or False

False- When calculating minimum lease payments for the present value test, the full amount of residual value is included, while when calculating minimum lease payments to capitalize lease liability, only the excess of the guaranteed residual value over the expected residual value is included in the calculation.

When determining the present value test, when both the implicit rate and the incremental borrowing are presented, the lessee can use both rates in determining the amount to report as the asset and related liability. True or False

False- When determining the present value test, the lessee should use the implicit interest rate, while when it's impractical to find the implicit interest rate, the lessee may use the incremental borrowing rate.

The lessee's footnote disclosures include the future lease payments as of the date of the latest balance sheet presented, in the aggregate, and for __________ succeeding fiscal years. a.15 b.10 c.20 d.5

d. 5

The lessor expenses initial direct costs at lease commencement (in the period in which it recognizes the profit or loss on the sale). If there is no selling profit or loss, the initial direct costs are deferred and recognized over the lease term for which type of Lease? Operating or Sales Type

Sales Type

In a finance lease, the lessee recognizes interest expense on the lease liability over the life of the lease using the effective-interest method and records the amortization expense on the right-of-use asset generally on a straight-line basis. True or False

True

In an operating lease, the lessee reports interest on the lease liability as part of the lease expense. True or false

True

Initial direct costs are incremental costs of a lease that would not have been incurred had the lease not been executed, True or False

True

The present value of the guaranteed residual value is included in the calculation of the minimum lease payments. True or False

True

When calculating minimum lease payments to capitalize lease liability, only the excess of the guaranteed residual value over the expected residual value is included in the calculation. True or False

True

​Initial direct costs incurred by the lessor are treated differently depending on the type of lease. True or False

True- Initial direct costs incurred by the lessor are treated differently depending on the type of lease.

Companies should use the finance method in accounting for the lease transaction when the lease term is equal to or greater than 75% of the remaining economic life of the leased asset. True or False

True- The guideline of the lease term classification test refers to the lease term to be 75% or greater than the remaining economic life of the leased asset.

​Under an operating lease, the lessor records a Lease Revenue in each period and retains the leased asset on its balance sheet. True or False

True- Under an operating lease, the lessor recognizes lease revenue when earned and retains the leased asset on its balance sheet and records depreciation on the asset each year over the asset's useful life.

When a lease is classified as a direct finance lease, the lessor should defer the profit and recognize it over the life of the lease. True or False

True- When a lease is classified as a direct finance lease, the profit is deferred and recognized over the life of the lea

​When valuing the lease liability, the lessee should include lease payments in the value of lease liability at the level of the index or rate at the commencement date and should expense any future difference in the lease payments due to changes in the index or rate when incurred. True or False

True- When valuing the lease liability, the lessee should include lease payments in the value of the lease liability at the level of the index/rate at the commencement date and any future change in the payments due to change in the index or rate is expensed in the period incurred.

Which of the following statements regarding the guaranteed residual value is true? a.At the end of the lease term, if the asset's fair value is greater than the guaranteed residual value, the lessee would return the asset to the lessor. b.Only the amounts of the guaranteed residual value that are likely to be owed to the lessor are included for purposes of classifying the lease as an operating or finance lease. c.At the end of the lease term, if the asset's fair value is greater than the guaranteed residual value, the lessee must pay the lessor the difference. d.The entire guaranteed residual value is included when measuring and recording the right-of-use asset and lease liability.

a. At the end of the lease term, if the asset's fair value is greater than the guaranteed residual value, the lessee would return the asset to the lessor. (At the end of the lease term, if the asset's fair value is greater than the guaranteed residual value, the lessee would return the asset to the lessor and would not have any additional liability. If the asset's fair value is less than the guaranteed residual value, the lessee must pay the lessor the difference.)

Which of the following is not an advantage of leasing from a lessee's viewpoint? a.The lease is a way of indirectly making a sale. b.Off-balance-sheet financing may be practiced. c.The asset can be acquired without having to make a substantial down payment. d.The risk of obsolescence may be reduced.

a. The lease is a way of indirectly making a sale. (The lessor would find that a lease is a way of indirectly making a sale, while the lessee is the party making the purchase.)

Which of the following statements is not true in relation to an operating lease? a.The lessor keeps the leased asset on its balance sheet and reports it as a current asset. b.On the income statement, the lessor will report rent revenue as well as depreciation expense on the leased asset, usually on a straight-line basis. c.Under an operating lease, a lessor retains substantially all the risks and benefits of ownership. d.An operating lease is a lease that transfers control of the identified asset.

a. The lessor keeps the leased asset on its balance sheet and reports it as a current asset. (Under an operating lease, a lessor retains substantially all the risks and benefits of owner-ship. The lessor keeps the leased asset on its balance sheet and reports it as a noncurrent asset separate from property, plant, and equipment held for the lessor's own use. On the income statement, the lessor will report rent revenue as well as depreciation expense on the leased asset, usually on a straight-line basis.)

Disclosure requirements for the lessor in an operating lease do not include a.minimum future rentals on noncancelable leases for each of the 10 succeeding fiscal years. b.total contingent rentals included in income for each period. c.cost and carrying amount. d.the amount of total accumulated depreciation.

a. minimum future rentals on noncancelable leases for each of the 10 succeeding fiscal years. (Disclosure requirements for the lessor in an operating lease include the minimum future rentals on noncancelable leases for each of the 5 succeeding fiscal years, and in total.)

For the lessor, the initial recording of a sales-type lease would not include a a.credit to Sales Revenue. b.debit to Merchandise Inventory. c.debit to Lease Receivable. d.credit to Equipment Leased to Others.

b. debit to Merchandise Inventory. (The initial recording of a sales-type lease would generally involve two journal entries. To record the sale, one would debit Lease Receivable and credit Sales Revenue. The entry to remove the asset from the lessor's balance sheet would debit Cost of Goods Sold and credit Equipment Leased to Others.)

Which of the following statements regarding lessees is true? a.A lessor acquires the right to use an identified asset in exchange for making lease payments. b.A lessee gives up the right to use an identified asset in exchange for the receipt of future lease payments. c.A lessee acquires the right to use an identified asset in exchange for making lease payments. d.A lessee acquires the right to use an identified asset in exchange for the receipt of future lease payments.

c. A lessee acquires the right to use an identified asset in exchange for making lease payments.

All of the following criteria meet the requirements of a finance lease except a.it contains a bargain purchase option. b.the lease term is for a major part of the remaining economic life of the underlying asset. c.the transfer of ownership of the property at the end of the lease term. d.the present value of the lease payments minus the residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset.

d. the present value of the lease payments minus the residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset. (The present value of the lease payments plus the residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset.)