Question_CHAP13_9Dec

1. Under the capital method of accounting for leases the excess of aggregate rentals over the cost of
leased property should be recognized as revenue of the lessor
a. In increasing amounts during the term of the lease
b. In constant amounts during the term of the lease
c. In decreasing amounts during the term of the lease
d. After the cost of leased property has been fully recovered through rentals
2. When measuring the present value of future rentals to be capitalized as part of the purchase price
in a lease that is be accounted for as a purchase, identifiable payments to cover taxes, insurance,
and maintenance should be
a. Included in the future rentals to be capitalized
b. Excluded from future rentals to be capitalized
c. Capitalized but at a different discount rate and recorded in a different account than future
rental payments
d. Capitalized but at a different discount rate and for a relevant period that tends to be different
than that for future rental payments
3. Equal monthly rental payments for a particular lease should be charged to rental expense by the
lessee for which of the following?
Capital lease Operating lease
a. Yes No
b. Yes Yes
c. No No
d. No Yes
4. In a lease that is recorded as a sales-type lease by the lessor, the difference between the gross
investment in the lease and sum of the present values of the components of the gross investment
should be recognized as income
a. In full at the lease’s expiration
b. In full at the lease’s inception
c. Over the period of the lease using the interest method of amortization
d. Over the period of the lease using the straight-line method of amortization
5. For a six-year capital lease, the portion of the minimum lease payment in the third year applicable
to the reduction of the obligation should be
a. Less than in the second year
b. More than in the second year
c. The same as in the fourth year
d. More than in the fourth year
6. Based solely upon the following sets of circumstances, indicate below which set gives rise to a
sales type or direct financing lease of a lessor:
Transfers Contains
Ownership bargain
By end of purchase
Lease? Provision?
a. No Yes
b. Yes No
c. Yes Yes
d. No No
7. Generally accepted accounting principles require that certain lease agreements be accounted for
as purchases. The theoretical basis for this treatment is that a lease of this type
a. Effectively conveys all of the benefits and risks incident to the ownership of property
b. Is an example of form over substance
c. Provides the use of the leased asset to the lessee for a limited period of time
d. Must be recorded in accordance with the concept of cause and effect
8. The appropriate valuation of an operating lease on the statement of financial position of a lessee
is
a. Zero
b. The absolute sum of the lease payments
c. The present value of the sum of the lease payments discounted at an appropriate rate
d. The market value of the asset at the date of the inception of the lease
9. A six-year-capital lease entered into on December 31, 2008, specified equal minimum annual
lease payments due on December 31, 2010. Minimum payment applicable to which of the
following increased over the corresponding December 31, 2010, minimum payment?
Reduction of
Interest Expense Liability
a. Yes Yes
b. Yes No
c. No Yes
d. No No
10. Office equipment recorded under a capital lease containing a bargain purchase option should be
amortized
a. Over the period of the lease using the interest method of amortization
b. Over the period of the lease using the straight-line method of amortization
c. In a manner consistent with the lessee’s normal depreciation policy for owned assets
d. In a manner consistent with the lessee’s normal depreciation policy for owned assets except
that the period of amortization should be the lease term
11. What is the primary accounting issue for lessees?
a. Recording interest expense on the lease obligation.
b. Determining whether the lease meets the 90% of fair value test.
c. Off-balance sheet financing.
d. The measurement of the leased asset under a capital lease.
12. What is the primary accounting issue for lessors?
a. Off-balance sheet financing.
b. Revenue recognition and expense allocation over the lease term.
c. Treating the lease in the same manner as the lessee does.
d. Determining whether the lease is a sales-type lease or a direct financing lease.
13. For the lessor to recognize a lease as a sales-type lease, the following must occur.
a. At least one of the capital lease criteria is met, at least one of the certainty criteria is met, and
there is a manufacturer or dealer’s profit.
b. At least one of the capital lease criteria is met, both certainty criteria are met, and there is a
manufacturer or dealer’s profit.
c. More than one of the capital lease criteria are met, both certainty criteria are met, and there is
a manufacturer or dealer’s profit.
d. Only one of the capital lease criteria is met, both certainty criteria are met, and there is a
manufacturer or dealer’s profit.
14. A net operating loss carryover that occurs in a company’s second year of operations
a. May cause a company to report a tax benefit in the current period income statement.
b. Has no effect on income tax expense of the current period because no taxes are paid.
c. Causes a company to report a deferred income tax liability for taxes that are not paid
currently.
d. Results in future taxable amounts.
15. For a sales-type lease, the net investment is equal to
a. The present value of the minimum lease payments plus executor costs.
b. The net investment minus unearned income.
c. Sales minus the gross profit recognized on the sale.
d. The present value of the gross investment.
16. When a lease contract does not transfer title to the lessee, there is no bargain purchase option,
and the lease term is not at least 75 percent of the estimated useful life of the leased asset.
a. The lessee must classify the lease as an operating lease.
b. The amount of unguaranteed salvage value, if any, determines whether the lease is a capital
lease or an operating lease.
c. The interest rate used to determine the present value of the minimum lease payments also
determines whether the lease is a capital lease or an operating lease.
d. The lessee must use the greater of the lessor’s rate of return or the lessee’s incremental
borrowing rate to determine whether the lease is a capital lease or an operating lease.
17. When does the lessee report executory costs as an expense?
a. When they are spelled out in the lease agreement.
b. Only when they are incurred by the lessee and the lease is classified as a capital lease.
c. When they are incurred by the lessee.
d. Only when they are incurred by the lessee and the lease is classified as an operating lease.
18. If the lessor incurs initial direct cost to bring about the lease, when are those costs expensed in
total during the first year of the lease term.
a. When the lease is classified as a sales-type lease.
b. When the lease is classified as a direct financing lease.
c. When the lease is classified as an operating lease.
d. Initial direct costs are always expensed during the first year of the lease term.
19. When a sale and leaseback occurs
a. A gain or loss on the sale of the leased asset is deferred and amortized over the lease term .
b. A gain on sale of the leased asset is deferred and amortized over the lease term.
c. Whether a gain or loss on sale of the leased asset is deferred and amortized over the lease
term depends on whether the lease is classified as a capital lease or an operating lease.
d. Both gains and losses are recognized in earnings when the asset is sold.
20. Which of the following would indicate that the lessee should not classify a lease as a capital
lease?
a. The fair value of the leased asset is $100,000 and the present value of the minimum lease
b. The lease provides for no unguaranteed salvage value.
c. The lessee has the option to purchase the leased asset in 4 years for $2 when the asset’s
d. The asset’s useful life is 20 years, a 4 year lease occurs when the asset is 26 years old.
payments is $95,000.
salvage value is expected to be $20,000.
Essay
1. List four advantages of leasing over the purchase of property for use by a business.
2. Define the following:
3. List the four criteria for recording a lease transaction as a capital lease.
4. How is the recorded amount of a lessee capital lease determined?
5. What is the difference between a sales-type and a direct financing type of capital lease?
6. What is a leveraged lease? How do lessees and lessors record leveraged leases?