ACC Chap 15
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.
A. 75% of the expected economic life of the leased property.
Damon is the lessee in connection with a lease. Under the new ASU, Damon would not record: A. Accretion revenue. B. Amortization expense. C. Interest expense. D. A right-of-use asset.
A. Accretion revenue. The lessor, not the lessee, accretes a residual 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. 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: A. An operating lease. B. A capital lease. C. A direct financing lease. D. A sales-type lease.
A. An operating lease.
Mann Co. is the lessor in a six-year lease beginning December 31, 2013. The agreement specifies that Woo Corp. make equal annual lease payments on December 31 of each year. Under the new ASU, in its 2014 income statement: A. Woo will report interest expense and amortization expense. B. Woo will report interest expense and accretion revenue. C. Mann will report accretion expense and amortization expense. D. Mann will report accretion expense and interest revenue.
A. Woo will report interest expense and amortization expense. The lessee incurs interest expense on its lease liability and amortizes its right of use asset.
If the leaseback portion of a sale-leaseback transaction is classified as a capital lease: A. Any gain is deferred and recognized as a reduction of rent expense. B. Any gain is deferred and recognized as a reduction of depreciation. C. Any gain is recognized at the lease's inception. D. There can be no gain.
B. Any gain is deferred and recognized as a reduction of depreciation. If the leaseback portion of a sale-leaseback transaction is classified as a capital lease any gain is deferred and recognized as a reduction of depreciation.
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.
C. Capital or operating.
B Corp. has a debt/equity ratio of 2 to 1. Not including any indirect effects on earnings, the debt/equity ratio is increased when B records: Capital Lease Operating Lease a. yes yes b. no no c. yes no d. no yes A. Option a B. Option b C. Option c D. Option d
C. Option c Operating leases don't affect assets, liabilities, or equity. A capital lease increases assets and liabilities the same amount and thus has no effect on equity, which is A - L = Equity. So, the numerator is increased with no effect on the denominator and the ratio increases.
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.
C. Present value of an annuity due table.
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 prepayment of rent.
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.
D. A sale of merchandise on account.
If the lessee and lessor use different interest rates to account for a capital lease, then: A. Total expenses for the lessee will be different from the lessor's total revenues. B. Total expenses for the lessee will equal the lessor's total revenues. C. GAAP has been violated by at least one party. D. The lessee will report more net income for the year.
A. Total expenses for the lessee will be different from the lessor's total revenues.
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: A. An addition to net income for depreciation. B. A cash inflow from financing activities. C. A cash outflow from investing activities. D. A cash inflow from operating activities.
A. An addition to net income for depreciation. The company would report the acquisition of an asset and its financing with a capital lease as a significant noncash investing and financing activity in the disclosure notes to the financial statements. By the indirect method of reporting cash flows from operating activities, the company would add back to net income the depreciation expense on the asset recorded since it didn't actually reduce cash. There was no interest in the first payment since an annuity due table was used. The principal portion is reported as a cash outflow from financing activities.
If the leaseback portion of a sale-leaseback transaction is classified as an operating lease: A. Any gain is deferred and recognized as a reduction of rent expense. B. Any gain is deferred and recognized as a reduction of depreciation. C. Any gain is recognized at the lease's inception. D. There can be no gain.
A. Any gain is deferred and recognized as a reduction of rent expense. If the leaseback portion of a sale-leaseback transaction is classified as an operating lease any gain is deferred and recognized as a reduction of rent expense. There is no asset to depreciate.
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 GAAP regarding accounting for leases. B. Any one of the six criteria specified by GAAP regarding accounting for leases. C. All four of the criteria specified by GAAP regarding accounting for leases. D. Any one of the four criteria specified by GAAP regarding accounting for leases.
A. Any one of first four classification criteria and both of the last two additional conditions 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): 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.
A. 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: A. Bargain purchase option. B. Lessee buy-out option. C. Lessor sell-out option. D. Guaranteed purchase option.
A. Bargain purchase option.
Barr Corp. is the lessee in a lease that contains a purchase option. Under the new ASU, Barr will consider the exercise price to be an additional cash payment if: A. Barr has a "significant economic incentive" to exercise the option. B. The exercise of the option is "reasonably assured." C. The exercise price is reasonably determinable. D. The exercise price never is considered to be an additional cash payment.
A. Barr has a "significant economic incentive" to exercise the option. The exercise price is considered to be an additional cash payment if the lessee has a "significant economic incentive" to exercise the option.
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.
A. Leased asset.
Crystal Corporation recorded a lease payment as follows: Rent Expense 2000 Cash 2000 Crystal must have a(n): A. Operating lease. B. Leveraged lease. C. Capital lease. D. Direct financing lease.
A. Operating lease.
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. Property, plant, and equipment.
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): A. Sales-type lease. B. Direct financing lease. C. Operating lease. D. Guaranteed lease.
A. Sales-type lease.
54. 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.
A. The amount to be recovered through periodic lease payments is reduced by the present value of the residual amount.
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.
A. The lessor borrows part of the acquisition price of the leased asset from a third party lender.
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.
A. The lessor receives a manufacturer's or dealer's profit.
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.
A. 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: 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.
A. The shorter of the physical life of the asset or the lease term.
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. A cash inflow from investing activities. B. A cash outflow from financing activities. C. A cash outflow from investing activities. D. A cash inflow from operating activities.
B. A cash outflow from financing activities. The company would report the acquisition of an asset and its financing with a capital lease as a significant noncash investing and financing activity in the disclosure notes to the financial statements. The cash lease payments are divided into the interest portion and the principal portion. The interest portion is reported as cash outflows from operating activities if using the direct method, but since an annuity due table was used there was no interest in the first payment. The principal portion is reported as a cash outflow from financing activities.
Under both U.S. GAAP and IFRS, a lease is a capital lease (called a finance lease under IFRS) if substantially all risks and rewards of ownership are transferred. In making this determination, more judgment, and less specificity, is applied using: A. U.S. GAAP. B. IFRS. C. Both U.S. GAAP and IFRS. D. Neither U.S. GAAP nor IFRS.
B. IFRS.
A guaranteed residual value at the inception of a capital lease should be: A. Excluded from minimum lease payments. B. Included as part of minimum lease payments at present value. C. Included as part of minimum lease payments at future value. D. Included as part of minimum lease payments only to the extent that guaranteed residual value is expected to exceed estimated residual value.
B. Included as part of minimum lease payments at present value. The guaranteed residual value is a promise made by the lessee that the lessor can sell the leased asset at the end of the lease for a guaranteed amount. Since this promise is a potential future payment, it must be included in the calculation of the present value of the lessee's future lease payments.
C Corp. has a rate of return on assets of 10%. Not including any indirect effects on earnings, the rate of return on assets is immediately increased when C records: Capital Lease Operating Lease a. yes yes b. no no c. yes no d. no yes A. Option a B. Option b C. Option c D. Option d
B. Option b Operating leases don't affect assets, liabilities, or equity. A capital lease increases assets and liabilities the same amount and thus has no effect of equity, which is A - L = Equity. Because assets, the denominator, increase and earnings remain the same, the rate of return decreases.
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.
B. The 90% test and the 75% test.
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.
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.
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: A. The lessee ignores any residual value for the leased property. B. The lessor ignores any residual value for the leased property. C. The lessee adds the present value of the residual value to the amount recorded for the lease. D. The lessor will always charge a higher annual lease rate.
B. The lessor ignores any residual value for the leased property.
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.
B. The lessor records depreciation and lease revenue.
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: 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.
B. The useful life to the lessee.
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.
C. 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. A cash outflow from investing activities. B. A cash outflow from financing activities. C. A cash inflow from operating activities. D. No cash outflow.
C. A cash inflow from operating activities. Rent payments for operating leases are reported in a statement of cash flows as operating activities by the lessee and operating activities by the lessor.
J Corp. entered into an operating lease in February. The company's December 31 statement of cash flows will report: A. A cash outflow from investing activities. B. A cash outflow from financing activities. C. A cash outflow from operating activities. D. No cash outflow.
C. A cash outflow from operating activities. Rent payments for operating leases are reported in a statement of cash flows as operating activities by the lessee and operating activities by the lessor.
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. An operating lease. B. A capital lease. C. A direct financing lease. D. A sales-type lease.
C. A direct financing lease.
The lessee normally measures the lease liability to be recorded as the: A. Future value of the minimum lease payments. B. Sum of the cash payments over the term of the lease. C. Present value of the minimum lease payments. D. Fair market value of the leased asset.
C. Present value of the minimum lease payments.
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.
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.
Which of the following statements regarding guaranteed residual values is true for the lessee? A. The asset and liability at the inception of the lease should be increased by the amount of the residual value. B. The asset and liability at the inception of the lease should be decreased by the amount of the residual value. C. The asset and liability at the inception of the lease should be increased by the present value of the residual value. D. The asset and liability at the inception of the lease should be decreased by the present value of the residual value.
C. The asset and liability at the inception of the lease should be increased by the present value of the residual value.
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.
C. The noncancelable lease term is equal to 90% or more of the expected economic life of the asset.
Matt Co. is the lessor in connection with a lease. Under the new ASU, Matt Co. would not record: A. Accretion revenue. B. A residual asset. C. Interest revenue. D. A right-of-use asset.
D. A right-of-use asset. The lessee, not the lessor, records a right-of-use 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 expensed at the inception of the lease in: A. An operating lease. B. A capital lease. C. A direct financing lease. D. A sales-type lease.
D. A sales-type lease.
For the lessee to account for a lease as a capital lease, the lease must meet: A. All four of the criteria specified by GAAP regarding accounting for leases. B. Any one of the six criteria specified by GAAP regarding accounting for leases. C. Any two of the criteria specified by GAAP regarding accounting for leases. D. Any one of the four criteria specified by GAAP regarding accounting for leases.
D. Any one of the four criteria specified by GAAP regarding accounting for leases.
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.
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.
D. 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? A. Lease expense, executory costs, interest expense. B. Depreciation expense, lease expense, interest expense. C. Executory costs, lease expense, depreciation expense. D. Depreciation expense, interest expense, executory costs.
D. Depreciation expense, interest expense, executory costs.
If the residual value of a leased asset turns out to be more than the amount guaranteed by the lessee, the: A. Lessor must compensate the lessee for the excess. B. Lessee must pay the lessor the amount of the excess. C. Lessee will reduce the last year's depreciation. D. Lessor is not obligated to compensate the lessee for the excess.
D. Lessor is not obligated to compensate the lessee for the excess.
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. Operating, direct financing, or sales-type.
S Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1. Not including any indirect effects on earnings, the immediate impact of recording a capital lease on these ratios is a(an): Return on Assets Debt/Equity a. increase increase b. decrease decrease c. increase decrease d. decrease increase A. Option a B. Option b C. Option c D. Option d
D. Option d A capital lease increases assets and liabilities the same amount and thus has no effect of equity, which is A - L = Equity. Because assets, the denominator, increase and earnings remain the same, the rate of return decreases. In the debt/equity ratio, the numerator is increased with no effect on the denominator and the ratio increases.
Additional lessor conditions for classification as a capital lease are consistent with the criteria of the: A. Matching principle. B. Cause and effect principle. C. Materiality concept. D. Realization principle.
D. Realization principle.
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.
D. The seller.
The appropriate asset value reported in the balance sheet by the lessee for an operating lease is: A. Present value of the minimum lease payments. B. Sum of the minimum lease payments. C. Fair value of the asset at the inception of the lease. D. Zero, unless a prepayment or accrual is involved.
D. Zero, unless a prepayment or accrual is involved.
