Chapter 15 (True and False; Multiple Choice)

A. An asset.

A direct financing lease is classified in the lessor's balance sheet as: A. An asset. B. A liability. C. Interest revenue. D. A contra account to lease liability.

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

A sales-type lease differs from a direct financing lease in one respect: A. The lessor receives a manufacturer's or dealer's profit. B. The lessor receives more interest than on a direct financing lease. C. The lessor receives less interest than on a direct financing lease. D. The lessor uses a longer amortization period than on a direct financing lease.

D. Realization principle

Additional lessor conditions for classification as a nonoperating lease are consistent with the criteria of the: A. Matching principle. B. Cause and effect principle. C. Materiality concept. D. Realization principle

C. Substance over form.

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

A. Any one of first four classification criteria and both of the last two additional conditions specified by SFAS No. 13.

For the lessor to account for a lease as a capital lease, the lease must meet: A. Any one of first four classification criteria and both of the last two additional conditions specified by SFAS No. 13. B. Any one of the six criteria specified by SFAS No. 13. C. All four of the criteria specified by SFAS No. 13. D. Any one of the four criteria specified by SFAS No. 13.

C. Capital or operating.

From the perspective of the lessee, leases may be classified as either: A. Direct financing or sales-type. B. Capital or direct financing. C. Capital or operating. D. Direct financing or operating.

D. Operating, direct financing, or sales-type.

From the perspective of the lessor, leases may be classified as either: A. Direct financing or sales-type. B. Operating, capital, or direct financing. C. Operating, sales-type, indirect financing. D. Operating, direct financing, or sales-type.

D. Conveys most of the risks and benefits of property ownership.

GAAP requires that some lease agreements be accounted for as purchases. The theoretical justification for this treatment is that a lease of this type: A. Complies with the concept of form over substance. B. Reflects the relationship of cause and effect. C. Satisfies the concept of historical cost. D. Conveys most of the risks and benefits of property ownership.

A. Property, plant and equipment.

Leasehold improvements usually are classified in a balance sheet as: A. Property, plant and equipment. B. Other long-term assets. C. Investments. D. Expenses.

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

Like other assets, the cost of a leasehold improvement is allocated as depreciation expense over its useful life to the lessee, which will be: A. The shorter of the physical life of the asset or the lease term. B. The physical life of the asset. C. The lease term. D. A time period determined by management.

C. The 90% of fair value test.

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

B. The 90% test and the 75% 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? A. The 75% test and the bargain purchase option. B. The 90% test and the 75% test. C. The 90 % test is the only one to which this applies. D. The bargain purchase and the passage of title criteria.

A. 75% of the expected economic life of the leased property.

One of the four criteria for a capital lease specifies that the lease term be equal to or greater than: A. 75% of the expected economic life of the leased property. B. 90% of the expected economic life of the leased property. C. 80% of the expected economic life of the leased property. D. 50% of the expected economic life of the leased property.

C. 90% of the fair value of the asset.

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: A. 90% of the cost of the asset. B. 75% of the fair value of the asset. C. 90% of the fair value of the asset. D. 75% of the cost of the asset.

D. A prepayment of rent.

Prepayments made on an operating lease are considered to be: A. A lease expense. B. A depreciable asset. C. Executory costs. D. A prepayment of rent.

D. A sale of merchandise on account

Recording a sales-type lease is similar to recording: A. A purchase on account. B. An exchange of assets. C. A sale of a fixed asset. D. A sale of merchandise on account

C. Present value of an annuity due table.

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: A. Ordinary annuity table. B. Present value of $1 table. C. Present value of an annuity due table. D. Future value of an annuity due table.

False

TRUE OR FALSE At the inception of a lease agreement, the company's debt to equity ratio and rate of return on assets are both affected whether the lease is classified as a capital lease or as an operating lease

True

TRUE OR FALSE: Capital leases are agreements that are formulated outwardly as leases, but are installment purchases in substance

True

TRUE OR FALSE: In accounting for operating leases, the lessor, rather than the lessee, will recognize depreciation on the leased asset

True

TRUE OR FALSE: In addition to the criteria that must be met by the lessee, the lessor must meet additional conditions for classification as a non-operating lease to satisfy the realization principle

False

TRUE OR FALSE: On a sale-leaseback transaction, any gain on the "sale" portion of the transaction is recognized immediately

True

TRUE OR FALSE: The criterion of 75% of economic life for classifying a lease as a capital lease is consistent with the basic premise that most of the risks and rewards of ownership occur during the first 75% of an asset's life

True

TRUE OR FALSE: When accounting for a non-operating lease, the lessee records the leased asset at the present value of the minimum lease payments or the asset's fair value, whichever is lower

C. A sales type lease.

Technoid would account for this as: A. A capital lease. B. A direct financing lease. C. A sales type lease. D. An operating lease.

D. is Zero, unless a prepayment or accrual is involved.

The appropriate asset value reported in the balance sheet by the lessee for an operating lease: A. is Present value of the minimum lease payments. B. is Sum of the minimum lease payments. C. is Fair value of the asset at the inception of the lease. D. is Zero, unless a prepayment or accrual is involved.

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

The four criteria provided in FASB Statement No. 13 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.

A. Leased asset.

When a capital lease is first recorded at the inception of the lease, the lessee typically debits: A. Leased asset. B. Rent expense. C. Lease expense. D. Lease receivable.

D. Be an operating lease.

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.

A. Asset and a liability.

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): A. Asset and a liability. B. Asset and a different amount should be recorded as a liability. C. Liability and a different amount should be recorded as an asset. D. Expense.

B. The useful life to the lessee.

For a leased asset under a lease that qualifies as a capital lease, the depreciation period used by the lessee must be: A. The same period that was used by the lessor. B. The useful life to the lessee. C. The term of the lease regardless of the lease provisions. D. The remaining life of the asset at the time the lease agreement took effect.

D. Any one of the four criteria specified by SFAS No. 13.

For the lessee to account for a lease as a capital lease, the lease must meet: A. All four of the criteria specified by SFAS No. 13. B. Any one of the six criteria specified by SFAS No. 13. C. Any two of the criteria specified by SFAS No. 13. D. Any one of the four criteria specified by SFAS No. 13.

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

If the lessor retains title to leased property under the terms of the lease: A. The amount to be recovered through periodic lease payments is reduced by the present value of the residual amount. B. The amount to be recovered through periodic lease payments is increased by the present value of the residual amount. C. The amount to be recovered will be the same as if there were no residual value. D. The lessor will record a greater amount of depreciation due to the residual value

D. The seller.

In a sale-leaseback arrangement, the lessee is also: A. The new owner of the property. B. The buyer. C. A third party guarantor. D. The seller.

A. A capital lease.

Lone Star Company would account for this as: A. A capital lease. B. A direct financing lease. C. A sales type lease. D. An operating lease.

C. Present value of the minimum lease payments.

The lessee normally measures the lease liability to be recorded as the: A. The future value of the minimum lease payments. B. The sum of the cash payments over the term of the lease. C. Present value of the minimum lease payments. D. The fair market value of the leased asset.

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

When a lease qualifies as a capital lease, what is the cost basis of the asset acquired? A. The present value of the minimum lease payments, exclusive of executory costs. B. The present value of the minimum lease payments plus executory costs. C. The sum of the gross minimum lease payments. D. The present value of the minimum lease payments plus the present value of executory costs.

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

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.

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

Which of the following is not among the criteria for classifying a lease as a capital lease? A. The agreement specifies that ownership of the asset transfers to the lessee. B. The agreement contains a bargain purchase option. C. The noncancelable lease term is equal to 90% or more of the expected economic life of the asset. D. The present value of the minimum lease payments is equal to or greater than 90% of the fair value of the asset.

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

Which of the following statements characterizes a leveraged lease? A. The lessor borrows part of the acquisition price of the leased asset from a third party lender. B. The lessor treats the lease as an operating lease. C. The lessee makes lease payments to the lessor's lender. D. The lessor's interest rate is always higher because the lease is leveraged.

B. The lessor records depreciation and lease revenue.

Which of the following statements characterizes an operating lease? A. The lessee records depreciation and interest. B. The lessor records depreciation and lease revenue. C. The lessor transfers title at the end of the lease term. D. The lessee records a leased asset.