Question 1

Risks and benefits of ownership transfer to the lessee with an operating lease.

Accepted Answer

In an operating lease, ownership does not transfer to the lessee; it remains with the lessor, distinguishing it from a finance lease where such a transfer is possible.

Question 2

Lease accounting rules may apply if an arrangement or contract does not explicitly state that it is a lease.

Accepted Answer

Lease accounting rules can apply to arrangements that do not explicitly identify themselves as leases but meet certain criteria that indicate a lease arrangement, such as the right to control the use of an identified asset for a period of time in exchange for consideration.

Question 3

For which of the following conditions will the lessor classify a lease as a sales-type lease?

Accepted Answer

A sales-type lease is classified when the present value of the lease payments is equal to or more than the fair value of the underlying asset, indicating a transfer of ownership benefits and risks.

Question 4

Exhibit 20-3
On January 1, 2016, Quinn Company enters into a five-year sales-type lease with Andy Company. The lease requires Andy to make five annual payments at the beginning of the year, with the first payment due January 1,
-Refer to Exhibit 20-3. What is the amount of sales revenue to be recognized by Quinn on January 1, 2016,?

Accepted Answer

The amount of sales revenue recognized by Quinn on January 1, 2016, would be the present value of the lease payments due from Andy Company. Since the lease is a sales-type lease, the entire present value of the lease payments is recognized as sales revenue at the commencement of the lease, which is January 1, 2016. Without the specific details of the lease payments or the interest rate, the most logical choice given the context is $150,000, assuming it represents the total present value of all lease payments.

Question 5

If a sales-type lease is renewed at the end of a lease term, the lessor must account for the lease as if it were a direct financing lease.

Accepted Answer

A sales-type lease and a direct financing lease are accounted for differently by the lessor at inception based on whether or not there is a manufacturer's or dealer's profit. The classification of a lease upon renewal would depend on the terms of the renewal and the criteria for lease classification at that time, not automatically treated as a direct financing lease.

Question 6

The lessor is the party in the lease agreement who acquires the right to use the leased asset in exchange for making future lease payments.

Accepted Answer

The lessor is the party who owns the asset and grants the right to use it to another party (the lessee) in exchange for lease payments.

Question 7

Exhibit 20-4
On January 1, 2016, Average Leasing Company entered into a direct financing lease with a lessee, Lenny Company. The lease agreement calls for five equal annual payments of $75,000 at the beginning of each year with the first payment due on January 1, 2016. The leased property has an estimated residual value of $10,000, which Lenny does not guarantee. The property remains the property of Average at the end of the lease term. Average desires a 12% rate of return. Present value factors for a 12% interest rate are as follows: 
-Refer to Exhibit 20-4. What is the amount of interest revenue that Average should recognize on the lease for the year ended December 31, 2016 round the answer to the nearest dollar)?

Accepted Answer

The answer of Exhibit 20-4
On January 1, 2016, Average Leasing...

Question 8

Which is not an advantage of leasing from a lessee's viewpoint?

Accepted Answer

"Off-balance-sheet financing" is actually considered an advantage of leasing from a lessee's viewpoint because it does not appear as a liability on the company's balance sheet, potentially making the company's financial position appear stronger.

Question 9

From the lessor's standpoint, which of the following statements regarding leasing is false?

Accepted Answer

In a lease, the asset is not transferred to the lessee and removed from the books of the lessor. Instead, the lessor retains ownership of the asset and it remains on the lessor's books as an asset. The other statements accurately reflect aspects of leasing from the lessor's perspective.

Question 10

For the lessor, cash receipts for a direct financing lease are classified as inflows in the financing activities section of the cash flow statement.

Accepted Answer

For the lessor, cash receipts from a direct financing lease are classified as inflows in the operating activities section of the cash flow statement, not the financing activities section.

Question 11

The account Unearned Interest: Leases should be reported on the lessor's financial statements as

Accepted Answer

The answer of The account Unearned Interest: Leases should be...

Question 12

Which is an advantage of leasing from a lessee's viewpoint?

Accepted Answer

Leasing allows the lessee to acquire the use of an asset without the need for a substantial initial cash outlay, which is a significant advantage for managing cash flow.

Question 13

A required disclosure of a direct financing lease is that the cost of property on lease and the amount of the total accumulated depreciation.

Accepted Answer

The answer of A required disclosure of a direct financing...

Question 14

In a direct financing lease, the lessor's carrying value of the leased asset is less than its fair value.

Accepted Answer

In a direct financing lease, the lessor's carrying value of the leased asset is equal to its fair value at the inception of the lease, as the lessor essentially finances the asset for the lessee and recognizes interest income over the lease term.

Question 15

Control over the underlying asset in a lease means directing its use and obtaining substantially all economic benefit.

Accepted Answer

Control over the underlying asset in a lease is defined by the ability to direct the use of the asset and to obtain substantially all of the economic benefits from its use, according to accounting standards such as IFRS 16.

Question 16

From the lessee's viewpoint, which of the following is not an advantage of leasing?

Accepted Answer

Option A is incorrect because changes in accounting standards, such as those from the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), now require lessees to recognize most leases on their balance sheets, including both the lease asset and lease liability. This reduces the off-balance-sheet financing advantage that leasing once offered.

Question 17

A lease transfers the right to use an identified asset for a period of time in exchange for rental payments.

Accepted Answer

A lease is a contractual agreement where the lessor (owner) allows the lessee (user) to use an identified asset for a specific period of time in exchange for rental payments, transferring the right to use the asset without transferring ownership.

Question 18

From the lessee's point of view, leasing provides a method of making a sale while still maintaining the advantages of ownership, including security in the asset and tax benefits.

Accepted Answer

From the lessee's perspective, leasing provides a method of acquiring the use of an asset without the need for large initial capital outlays, but it does not confer the advantages of ownership such as security in the asset and tax benefits; those advantages typically accrue to the lessor.

Question 19

A lessor has an account, Equipment Leased to Others, and the related account, Accumulated Depreciation: Equipment Leased to Others, on its year-end balance sheet. How should the lease related to these accounts be classified?

Accepted Answer

These accounts suggest that the lessor retains ownership of the equipment and is depreciating it, which is characteristic of an operating lease.

Question 20

The identified asset in the lease must be physically distinct and not substitutable.

Accepted Answer

In a lease, the identified asset must be physically distinct so that the lessee can obtain substantially all of the economic benefits from its use. It should not be substitutable by the lessor at its discretion, ensuring the lessee has control over the asset during the lease term.

Quiz 20: Accounting for Leases