Ch 15 Intermediate II

One of the four criteria for a capital lease specifies that the lease term be equal to or greater than:

75% of the expected economic life of the leased property

One of the four criteria for a capital lease specifies that the present value of the minimum lease payments be equal to or greater than:

90% of the fair value of the asset.

P Corp. leased an asset to L Corp. using an operating lease in February. P Corp.'s December 31 statement of cash flows will report:

A cash inflow from operating activities.

M Corp. recorded a capital lease in February using an annuity due present value table. The company's December 31 statement of cash flows using the direct method will report:

A cash outflow from financing activities.

J Corp. entered into an operating lease in February. The company's December 31 statement of cash flows will report:

A cash outflow from operating activities

Costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire that lease are called initial direct costs. Initial direct costs are matched with the interest revenues they help generate in:

A direct financing lease

Prepayments made on an operating lease are considered to be:

A prepayment of rent.

Recording a sales-type lease is similar to recording

A sale of merchandise on account

Costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire that lease are called initial direct costs. Initial direct costs are expensed at the inception of the lease in:

A sales-type lease.

L Corp. recorded a capital lease in February using an annuity due present value table. The company's December 31 statement of cash flows using the indirect method will report

An addition to net income for depreciation.

A direct financing lease is classified in the lessor's balance sheet as:

An asset.

Costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire that lease are called initial direct costs. Initial direct costs are recorded as assets and amortized over the term of the lease in:

An operating lease

For the lessor to account for a lease as a capital lease, the lease must meet:

Any one of first four classification criteria and both of the last two additional conditions specified by GAAP regarding accounting for leases

For the lessee to account for a lease as a capital lease, the lease must meet

Any one of the four criteria specified by GAAP regarding accounting for leases

For a capital lease, an amount equal to the present value of the minimum lease payments should be recorded by the lessee as a(n):

Asset and a liability

The lessee's option to purchase a leased asset at a price that is sufficiently lower than the asset's expected fair value so that the exercise of the option appears reasonably assured is called a:

Bargain purchase option

If the lessor records unearned rent at the beginning of a lease term, the lease must:

Be an operating lease.

From the perspective of the lessee, leases may be classified as either

Capital or operating.

GAAP requires that some lease agreements be accounted for as purchases. The theoretical justification for this treatment is that a lease of this type:

Conveys most of the risks and benefits of property ownership

What are the three types of expenses that a lessee experiences with a capital lease?

Depreciation expense, interest expense, executory costs

A guaranteed residual value at the inception of a capital lease should be

Included as part of minimum lease payments at present value

When a capital lease is first recorded at the inception of the lease, the lessee typically debits:

Leased asset

If the residual value of a leased asset turns out to be more than the amount guaranteed by the lessee, the:

Lessor is not obligated to compensate the lessee for the excess

Crystal Corporation recorded a lease payment as follows: Debit: Rent Expense Credit: Cash: Crystal must have a(n):

Operating lease.

From the perspective of the lessor, leases may be classified as either:

Operating, direct financing, or sales-type

Since the lease payments under a lease agreement are normally paid at the beginning of each period, the appropriate compound interest table to be used to determine the amount at which the leased asset should be recorded is the:

Present value of an annuity due table.

The lessee normally measures the lease liability to be recorded as the:

Present value of the minimum lease payments

Leasehold improvements usually are classified in a balance sheet as:

Property, plant, and equipment

Additional lessor conditions for classification as a capital lease are consistent with the criteria of the:

Realization principle.

A noncancelable lease contains a bargain purchase option. The fair value of the asset exceeds the lessor's cost of the asset. Collectibility of the lease payments is assured and there are no material cost uncertainties surrounding the lease. Therefore, the lease will be accounted for by the lessor as a(n):

Sales-type lease.

Distinguishing between operating and capital leases is due in large part to the accounting concept of:

Substance over form

Of the four criteria for a capital lease, the one that most often is the decisive criteria is:

The 90% of fair value test

Of the four criteria for a capital lease, which two are not applied if the lease begins during the final quarter of the asset's useful life?

The 90% test and the 75% test.

If the lessor retains title to leased property under the terms of the lease:

The amount to be recovered through periodic lease payments is reduced by the present value of the residual amount.

Which of the following statements regarding guaranteed residual values is true for the lessee?

The asset and liability at the inception of the lease should be increased by the present value of the residual value.

The four criteria provided in GAAP for distinguishing a capital lease from an operating lease do not include:

The collectibility of the lease payments must be reasonably predictable.

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

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

Which of the following statements characterizes a leveraged lease?

The lessor borrows part of the acquisition price of the leased asset from a third party lender.

If the lessee expects to obtain title to leased property due to a bargain purchase option or passage of title at the end of the lease term:

The lessor ignores any residual value for the leased property.

A sales-type lease differs from a direct financing lease in one respect:

The lessor receives a manufacturer's or dealer's profit.

Which of the following statements characterizes an operating lease?

The lessor records depreciation and lease revenue

Which of the following is not among the criteria for classifying a lease as a capital lease?

The noncancelable lease term is equal to 90% or more of the expected economic life of the asset.

When a lease qualifies as a capital lease, what is the cost basis of the asset acquired?

The present value of the minimum lease payments, exclusive of executory costs.

Like other assets, the cost of a leasehold improvement is allocated as depreciation expense over its useful life to the lessee, which will be:

The shorter of the physical life of the asset or the lease term.

For a leased asset under a lease that qualifies as a capital lease because of a bargain purchase option, the depreciation period used by the lessee must be:

The useful life to the lessee.

If the lessee and lessor use different interest rates to account for a capital lease, then:

Total expenses for the lessee will be different from the lessor's total revenues.

The appropriate asset value reported in the balance sheet by the lessee for an operating lease is:

Zero, unless a prepayment or accrual is involved