From the perspective of the lessee, leases may be classified as either;
Capital or operating.
From the perspective of the lessor, leases may be classified as either;
Operating, direct financing, or sales-type.
Distinguishing between operating and capital leases is due in large part to the accounting concept of;
Substance over form.
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.
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.
Of the four criteria for a capital lease, the one that most often is the decisive criteria is;
The 90% of fair value test.
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.
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 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.
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.
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.
The lessee normally measures the lease liability to be recorded as the:
Present value of the minimum lease payments.
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.
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.
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.
A direct financing lease is classified in the lessor's balance sheet as:
An asset.
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.
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.
When a capital lease is first recorded at the inception of the lease, the lessee typically debits:
Leased asset.
Additional lessor conditions for classification as a capital lease are consistent with the criteria of the;
Realization principle.
A sales-type lease differs from a direct financing lease in one respect: ;
The lessor receives a manufacturer's or dealer's profit.
Recording a sales-type lease is similar to recording:;
A sale of merchandise on account.
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.
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, th
Sales-type lease.
A guaranteed residual value at the inception of a capital lease should be;
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
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.
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.
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.
What are the three types of expenses that a lessee experiences with a capital lease?;
Depreciation expense, interest expense, executory costs.
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.
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.
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
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.
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: Rent payments for operating leases are reported in a statement of cash flows as financing activities by the lessee and investing 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 cash outflow from operating activities: Rent payments for operating leases are reported in a statement of cash flows as financing activities by the lessee and investing activities by the lessor.
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.
In a sale-leaseback arrangement, the lessee is also
The seller.
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:
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
Major reasons why a company may become involved in leasing to other companies is (are)
interest revenue.,high residual values, tax incentives.
Advantage of leasing?
Off-balance-sheet financing,Less costly financing, 100% financing at fixed rates
Which of the following best describes current practice in accounting for leases?
Leases similar to installment purchases are capitalized.
While only certain leases are currently accounted for as a sale or purchase, there is theoretic justification for considering all leases to be sales or purchases. The principal reason that supports this idea is that
a lease reflects the purchase or sale of a quantifiable right to the use of property.
An essential element of a lease conveyance is that the
lessor conveys less than his or her total interest in the property.
What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee?
The lessee must increase the present value of the minimum lease payments by the present value of the option price.
The amount to be recorded as the cost of an asset under capital lease is equal to the
present value of the minimum lease payments or the fair value of the asset, whichever is lower.
28. The methods of accounting for a lease by the lessee are
operating and capital lease methods.
Which of the following is a correct statement of one of the capitalization criteria?
The lease term is equal to or more than 75% of the estimated economic life of the leased property.
30. Minimum lease payments may include a
penalty for failure to renew, bagain purchase option, orguaranteed residual value
31. Executory costs include maintenance.,property taxes., insurance.
maintenance.,property taxes., insurance.
In computing the present value of the minimum lease payments, the lessee should
use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee.
In computing depreciation of a leased asset, the lessee should subtract.
a guaranteed residual value and depreciate over the term of the lease.
In the earlier years of a lease, from the lessee's perspective, the use of the
capital method will cause debt to increase, compared to the operating method.
A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over the
remaining economic life.
Based solely upon the following sets of circumstances indicated below, which set gives rise to a sales-type or direct-financing lease of a lessor?
Contains BPO or Collectibility of Lease Payments Assured
Which of the following would not be included in the Lease Receivable account?
All would be included
In a lease that is appropriately recorded as a direct-financing lease by the lessor, unearned income
should be amortized over the period of the lease using the interest method.
In order to properly record a direct-financing lease, the lessor needs to know how to calculate the lease receivable. The lease receivable in a direct-financing lease is best defined as
the present value of minimum lease payments.
If the residual value of a leased asset is guaranteed by a third party
it is treated by the lessee as an additional payment and by the lessor as realized at the end of the lease term.
. The primary difference between a direct-financing lease and a sales-type lease is the
recognition of the manufacturer's or dealer's profit at the inception of the lease.
A lessor with a sales-type lease involving an unguaranteed residual value available to the lessor at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts?
The present value of the minimum lease payments.
For a sales-type lease,
the gross profit will be the same whether the residual value is guaranteed or unguaranteed.
In a direct-financing lease,
initial direct costs are added to the net investment in the lease.
In a sales-type lease,
initial direct costs are expensed in the year of incurrence.
For operating leases,
initial direct costs are deferred and allocated over the lease term.
The Lease Liability account should be disclosed as
current portions in current liabilities and the remainder in noncurrent liabilities.
When a company sells property and then leases it back, any gain on the sale should usually be
deferred and recognized as income over the term of the lease.