Multiple Choice- Lesse/Lessor

Carr, Inc. intended to lease a machine from Tevelyan Corp. Carr's incremental borrowing rate is 12%. The prime rate of interest in 8%. Trevelyan's implicit rate in the lease is 14%, which is known to Carr. Carr, the lessee, computes the present value of lease payments using which of the following rates? A) 14% B) 12% C) 10% D) 8%

A

The lessee should amortize the capitalizable cost of a right-of-use asset in a manner consistent with the lessee's normal depreciation policy for owned assets for a lease that: Transfers ownership of the Contains a bargain property to the lessee by purchase option the end of the lease term A) Yes Yes B) No No C) Yes No D) No Yes

A

A lease classified as a direct-financing type lease typically has/includes a(n): A) bargain purchase option. B) residual value guaranteed by a third party. C) residual value guaranteed by the lessee. D) unguaranteed residual value.

B

A lessee must classify its non-cancellable lease for a machine as a finance lease under which of the following conditions? A) Lease term is 7 years; estimated economic useful life of the machine at the inception of the lease is 10 years. B) Lessee has option to purchase leased machine at end of lease term for $100 when the estimated residual value of the machine at the end of the lease term is $500. C) Present value of lease payments (including a guaranteed residual value) = $8,500; fair market value of the machine at the inception of the lease = $10,000. D) The leased asset is expected to have an alternative use to the lessor at the end of the lease term

B

At the inception of a lessee's operating lease, when recording the lease liability, the lessee should: A) include a guaranteed residual value as part of lease payments at present value. B) include a guaranteed residual value as part of lease payments at present value only to the extent of the amount that is expected to exceed the estimated residual value at the end of the lease term. C) include a guaranteed residual value as part of lease payments at future value. D) exclude a guaranteed residual value from lease payments.

B

Callahan Auto Parts leases a piece of machinery for its new brake pad division in Sandusky, Ohio. Callahan appropriately accounts for the lease as a finance lease. What information must Callahan disclose about the lease? A) The present value of the expected sales from the production of the brake pads by piece of machinery. B) A general description of the lease, including the residual value of the machinery and the interest rate associated with the lease. C) A general description of the lease, including the present value of the benefit of the finance lease compared to the present value of the cost of purchasing the machinery. D) A breakout of lease income by lease type.

B

What are the three types of costs that a lessee experiences with finance leases? A) Lease expense, interest expense, and amortization expense. B) Interest expense, amortization expense, and executory costs. C) Amortization expense, executory costs, and lease expense. D) Executory costs, interest expense, and lease expense

B

When accounting for initial direct costs in a lease, the lessee will: A) calculate the present value of the initial direct costs using the present value of a single sum associated with the lease term and include this amount in the lease liability. B) include the initial direct costs at their undiscounted amount in the calculation of the right-of-use asset. C) include the initial direct cost at their undiscounted amount in the calculation of the lease liability. D) calculate the present value of the initial direct costs using the present value factor of a single sum associated with the lease term and include this amount in the right-of-use asset..

B

Which of the following is an accurate statement regarding a lessor's accounting treatment for initial direct costs incurred in connection with its leasing arrangements? A) A lessor should immediately expense initial direct costs incurred in connection with an operating lease. B) A lessor should immediately expense initial direct costs associated with a sales-type lease that has selling profit or loss. C) A lessor should defer initial direct costs associated with a sales-type lease that has selling profit or loss, and recognize those costs over the lease term. D) A lessor should add the initial direct costs to the right-of-use asset.

B

Which of the following is characteristic of a non-cancellable sales-type lease in which the property is returned to the lessor at the end of the lease term? A) At lease inception, lessee records cost of goods sold equal to lessor's cost minus present value of any unguaranteed residual value accruing to the lessor. B) At lease inception, lessor records cost of goods sold equal to lessor's cost minus present value of any unguaranteed residual value accruing to the lessor. C) Lessor depreciates the leased asset over its estimated useful life. D) Lessor depreciates the leased asset over the lease term.

B

1. Marnie Company enters into a two-year lease. The terms of the lease do not transfer ownership and do not contain a bargain purchase option. The lease is for 60% of the asset's economic life and represents 80% of its fair value. The asset is not a specialized asset and does have alternative uses. How should Marnie classify and record the lease? A) The lease is classified as an operating lease, and no lease liability is recorded at the inception because it does not meet finance lease criteria. B)The lease should be classified as a short-term lease because it is for only two years. C)The lease should be classified as an operating lease, and a lease liability should be recorded at the inception of the lease. D)The lease should be classified as a finance lease, and a lease liability should be recorded at the inception of the lease.

C

A lease includes variable lease payments. The lessee knows the amount of the variable lease payments at the inception of the lease. How should the lessee account for the payments? A) Variable lease payments should be expensed in the period incurred. B) Variable lease payments should be included at their gross amount in the lease liability. C) The variable lease payments should be included at their present value in the lease liability. D) Variable lease payments should be paid by the lessor as a lease incentive.

C

A lessee entered into a 6-year finance lease on December 31, 2018. The lease specified equal minimum annual lease payments due on December 31 of each year. The first minimum annual lease payment, paid on December 31, 2018, consists of which of the following? Interest expense Lease liability A) Yes Yes B) Yes No C) No Yes D) No No

C

A lessor and lessee entered into a lease. The lease is classified as an operating lease by both the lessee and lessor. The lease term is shorter than the useful life of the asset. How will the leased asset be accounted for? A) The lessee will record amortization expense associated with the right-of-use asset over the asset's useful life. B) The lessee will depreciate the asset over the lease term. C) The lessor will retain the asset on its books and record depreciation expense over the asset's useful life. D) The lessor will retain the asset on its books and record depreciation expense over the lease term.

C

A lessor enters into a sales-type lease with an unguaranteed residual value. At the lease inception, how should the lessor record the unguaranteed residual value? A) The unguaranteed residual value should not be recorded. B) The present value of the unguaranteed residual value should be included in the credit to sales revenue. C) The present value of the unguaranteed residual value should be included in the debit to net investment in the lease. D) The present value of the unguaranteed residual value should be included in the debit to cost of goods sold.

C

In a net finance lease, lease payments used in computing a lessee's lease liability would include which of the following? A)Full amount of any guaranteed residual value. B)Variable lease payments that are adjusted annually by a change in the Consumer Price Index. C)An option to purchase a leased asset at a price significantly lower than the asset's expected fair value at the date the option becomes exercisable. D)Executory costs

C

Rental/lease income should be recognized by the lessor on a straight-line basis over the lease term according to the provisions of which of the following lease types? Direct-financing lease Operating lease Sales-type lease A) Yes Yes Yes B) Yes No No C) No Yes No D) No No Yes

C

A six-year finance lease expiring on December 31 specifies equal annual lease payments. Part of this payment represents interest and part represents a reduction in the lease liability. The portion of the lease payment in the fifth year applicable to reduction of the net lease liability should be: A) the same as in the sixth year. B) more than in the sixth year. C) less than in the fourth year. D) more than in the fourth year.

D

In a lease that is recorded as a sales-type lease by the lessor, interest revenue: A) should be recognized in full as revenue at the lease's inception. B) should be recognized over the period of the lease using the straight line method. C) does not arise. D) should be recognized over the period of the lease using the effective interest method.

D

On January 1, 2017, Trelease Co. signed an 8-year lease to use equipment with a 10-year life. The present value of the 16 equal semiannual payments equaled 85% of the equipment's fair value on January 1, 2017. The contract had no provision whereby Trelease, the lessee, could acquire legal ownership of the equipment. Should Trelease recognize lease expense or interest expense in 2018, and should the expense recognized in 2019 be the same or smaller than the expense recognized in 2018? 2018 expense recognized 2019 amount recognized compared to 2018 A) Lease The same B). Lease Smaller C) Interest The Same D) Interest Smaller

D