Deck 17: Leases

Question 1

The first lease accounting standard was issued in 1966.

Answer 1

False

Question 2

Leases have been the subject of more accounting standards than any other single topic.

Answer 2

True

Question 3

The legal form of a lease is an executory, or unperformed, contract.

Answer 3

True

Question 4

It was in the 1940s that accounting policy makers first responded to the lease accounting problem.

Question 5

Prior to ARB 38, the accounting procedure for lease payments was to record them as periodic revenues for lessors and as purchases of assets for lessees.

Question 6

Only leases that would be considered true leases in the eyes of the law are capitalized.

Question 7

An argument against lease capitalization was that the use of present value discounting techniques introduced less reliable accounting numbers into the financial statements.

Question 8

One of the major arguments for lease capitalization was verifiability.

Question 9

ARB 38 recommended that where it was obvious a lease contract was in substance a purchase, an asset, but not a liability, should be recognized in the lessee's balance sheet.

Question 10

There are no real differences between true leases and purchase arrangements.

Question 11

With financing-type leases, there is no sales revenue, only interest revenue earned from the debt financing.

Question 12

ARB 43 recommended capitalization for leases that were, in substance, installment purchases.

Question 13

Classifying leases as either operating or capital leases is an example of attempting to establish finite uniformity.

Question 14

The concept of full payout refers to the lessee making all required payments according to the lease agreement.

Question 15

Some capital leases are treated as loans with income realized through implicit interest in each lease payment.

Question 16

Legal remedies available to lessors in the event of lessee default treat leases like unilaterally unperformed executory contracts.

Question 17

A basic issue with lessor capitalization is symmetry with lessee accounting.

Question 18

APB Opinion No. 5 was criticized on the grounds that it excluded many leases that should be capitalized.

Question 19

SFAS No. 13 identifies four capitalization tests that are now applicable to both lessees and lessors.

Question 20

If a lease is interpreted as a mutually unperformed executory contract, it can be argued that an asset and liability do not exist for the lessee.

Question 21

Supplemental disclosures of noncapitalized leases under SFAS No. 13 are greater than under APB Opinion No. 31.

Question 22

Which of the following is not a characteristic of a true lease?

A) Government agencies recognized the lessee as the owner of the leased asset.
B) The rentals charged under leasing plans without an option to purchase approximate the rentals charged under plans with such an option.
C) The lessor retains the right to inspect the equipment during the term of the lease.
D) There is no mention of interest as a factor in rental charges.

Question 23

A position paper of the G4+1 must be put into effect by each of the member organizations.

Question 24

The criteria for capitalizing a real estate lease are identical to those of other leases.

Question 25

From a lessee's point of view, a leveraged lease is very different from the other leases.

Question 26

Under SFAS No. 13, payments on capital leases are separated into the equivalent of principal and interest each period.

Question 27

Land leases are capitalized only if title passes to the lessee at the end of the lease term and the lease contract contains a bargain purchase option.

Question 28

Under current requirements, the weak disclosures of noncapitalized leases create incentives to structure leases in such a way as to avoid both capitalization and supplemental disclosure.

Question 29

Which of the following is not one of the criteria that have been suggested for lease capitalization?

A) Lessee builds up a material equity in the leased property.
B) Lessee pays costs normally incident to ownership.
C) Lease is between related parties.
D) Lease agreement is cancelable.

Question 30

Which of the following is one of the criteria that have been suggested for lease capitalization?

A) The lessee treats lease payments as periodic expenses.
B) The lessor pays costs normally incident to ownership.
C) The lessee treats the lease as a purchase for tax purposes.
D) Leased property is special purpose to the lessor.

Question 31

All of the tests or conditions identified in SFAS No. 13 must be met before a lease can be capitalized.

Question 32

Which of the following is a characteristic of a true lease?

A) The presence of a provision for the transfer of the title to the lessee
B) The presence of interest as a factor in rental charges
C) Rental charges that are competitive with those charged by other lessors of similar equipment
D) The assumption of the risk of loss by the lessee

Question 33

The requirements of SFAS No. 13 represent conservatism because a higher interest rate will cause a higher present value and could therefore result in lease capitalization.

Question 34

It can be argued that all leases over one year should be capitalized.

Question 35

The initial impetus for lease capitalization was caused by concern over lessee balance sheets.

Question 36

It is no less true under SFAS No. 13 than it was under ARB 38 that more leases are being capitalized than should be.

Question 37

Which of the following applies if a lease is interpreted as unilaterally unperformed by the lessee?

A) The lease contract is fully executed by the lessor when possession of the leased asset is transferred to the lessee.
B) An asset and liability do not exist for the lessee.
C) The lessor permits use of the asset for one period at a time and only if the rentals are paid by the lessee.
D) Current lease payments are expensed by the lessee.

Question 38

The G4+1 report on leases would make all leases financing leases.

Question 39

Which of the following is not a possible treatment of a capital lease?

A) The lessee treats lease payments as periodic expenses.
B) The lessor treats the lease like a sale with vendor financing.
C) The lease is treated by a third party like a loan with income realized through implicit interest in each lease payment.
D) The lessee treats the lease as a purchase with debt financing.

Question 40

A sale and leaseback occurs when the owner of an asset sells it and enters into a lease agreement to lease the asset back.

Question 41

Which of the following is not a true statement regarding the legal remedies available to lessors in the event of lessee default?

A) The lease is significantly different from other debt arrangements.
B) The lessee is not liable for future lease payments.
C) The lease is considered unilaterally unperformed.
D) The lessor must first mitigate the loss of rents by selling the asset or leasing it again.

Question 42

Which of the following represents the legal approach to capital leases?

A) Limit capital leases to leases that are virtually conditional sales agreements with installment payments.
B) Capitalize leases where a purchase equivalent has occurred.
C) The lease treatment is the same for lessor and lessee.
D) Capitalize leases that are not true leases.

Question 43

Which of the following represents the material equity approach to capital leases?

A) Limit capital leases to leases that are virtually conditional sales agreements with installment payments.
B) Capitalize leases where a purchase equivalent has occurred.
C) The lease treatment is the same for lessor and lessee.
D) Capitalize leases that are not true leases.

Question 44

Which of the following lease treatments interprets the lease contract as an operating lease?

A) A rental agreement
B) A loan equivalent
C) A sale equivalent
D) A purchase

Question 45

Which of the following does not apply to SFAS No. 13?

A) It changed capitalization criteria.
B) Noncancellability and material equity were abandoned in favor of broader tests representing substantive transfers of ownership benefits and risks.
C) It is intended to capitalize fewer leases than previous standards.
D) It provides that the lessee use the lessor's implicit rate in the lease if it is obtainable and if the implicit rate is lower than the lessee's incremental borrowing rate.

Question 46

Which of the following is not a true statement regarding a sale and leaseback?

A) It occurs when the owner of an asset sells the asset and enters into a lease agreement to lease the asset back.
B) The lessor and lessee both use the standard criteria for classifying such a lease as operating or capital.
C) The lessor is the original legal owner and the lessee is the new legal owner.
D) SFAS No. 13 allows a gain or loss to be immediately recognized in cases where the original owner retains the use of a substantially smaller part of the total asset.

Question 47

Which of the following was the first accounting standard to address lessor accounting?

A) ARB 38 in 1949
B) APB Opinion No. 7 in 1966
C) APB Opinion No. 3 in 1973
D) SFAS No. 13 in 1976

Question 48

A lease must be accounted for as either a rental agreement, a sale equivalent with debt financing, or a loan equivalent by:

A) The lessor.
B) The lessee.
C) Both the lessor and lessee.
D) None of the above

Question 49

Which of the following is not a true statement regarding ARB 38?

A) It was the first lease accounting standard.
B) It recommended capitalization for leases that were in substance installment purchases.
C) It was most applicable to leases that were de facto conditional sales agreements.
D) Noncancellability was introduced as a precondition for capitalization.

Question 50

How many of the four capitalization tests of SFAS No. 13 must be met for a lease to be capitalized?

A) One
B) Two
C) Three
D) Four

Question 51

Which of the following applies to SFAS No. 13?

A) It applied the four criteria for a capital lease to both lessees and lessors.
B) It created inconsistencies in financing-type leases.
C) It eliminated asymmetry between lessor and lessee accounting.
D) It requires the lessee to always use the lessor's implicit interest rate.

Question 52

Which of the following is not a supplemental disclosure by the lessee required by SFAS No. 13 for noncancellable operating leases in excess of one year?

A) Future minimum rental payments in aggregate and for each of the succeeding five periods
B) The present value of minimum lease payments
C) Total minimum rentals to be received under noncancellable subleases
D) Rental expenses with separate totals for minimum rentals, contingent rentals, and sublease rentals

Question 53

Which of the following applies to leveraged leases?

A) Leveraged leases are a special type of operating lease involving three parties.
B) The lessor acquires an asset to be leased by borrowing money from a third party.
C) From a lessor's viewpoint, this type of lease is not any different from other leases.
D) The FASB concluded in SFAS No. 13 that the financing-type lease plus debt transaction analogy was adequate to report leveraged leases.

Question 54

Which of the following represents the "transfer of the benefits and risks of ownership" approach to capital leases?

A) Limit capital leases to leases that are virtually conditional sales agreements with installment payments.
B) Capitalize leases where a purchase equivalent has occurred.
C) The lease treatment is the same for lessor and lessee.
D) Capitalize leases that are not true leases.

Question 55

Which of the following is a true statement regarding APB Opinion No. 5?

A) It took a legalistic approach to determining whether a lease was in substance a purchase.
B) The stated objective was to clarify ARB 38, not change it.
C) Cancellability was viewed as mitigating the executory nature of lease contracts.
D) It greatly increased the number of leases that were capitalized.

Question 56

Respond to the following:
a.
Why has so much attention been given to leases in accounting standards?
b.
Why is leasing such a popular method of acquiring assets?
c.
How have accounting procedures for leases changed since ARB 43?

Question 57

A lease must be accounted for as either a rental agreement or a purchase equivalent with debt financing by:

A) The lessor.
B) The lessee.
C) Both the lessor and lessee.
D) None of the above

Question 58

Which of the following is not one of the capitalization tests now applicable to both lessees and lessors?

A) Title passes to the lessee at the end of the lease term.
B) The lease contract contains a bargain purchase option.
C) The lease term is at least 75 percent of estimated useful life.
D) Lease agreement is noncancellable for a long term.

Question 59

Which of the following statements applies to APB Opinion No. 31?

A) It was criticized on the grounds that it resulted in inconsistent capitalization of financing-type leases.
B) It required disclosures adequate to permit users to informally capitalize noncapitalized lease obligations if they so desired.
C) It was an omnibus opinion.
D) It was concerned with lease contracts between related parties.

Question 60

What was the intent of APB Opinion No. 27?

A) To achieve near symmetry in lessee and lessor accounting
B) To expand the use of the material-equity method
C) To broaden the criteria for capitalization
D) To restrict the criteria for capitalization

Question 61

How does lease accounting under the IASB differ from lease accounting under FAS?

Question 62

Describe the two types of capital leases that exist from the lessor's point of view.

Question 63

Respond to the following:
a.
What are the current criteria for capitalization identified in SFAS No. 13?
b.
How is the minimum lease payment calculated?

Question 64

Discuss the effectiveness of SFAS No. 13 in addressing the lease capitalization problem.

Question 65

How does the accounting prescribed in SFAS No. 13 seek to make a capital lease resemble a purchase by the lessee of an asset with debt financing?

Question 66

Discuss two types of economic consequences of lease accounting.