Question 1

Companies always enter into lease agreements to finance the purchase of expensive assets over time.

Accepted Answer

Companies may enter into lease agreements for various reasons, such as avoiding large upfront costs, maintaining cash flow, or for tax benefits, not solely for financing purchases.

Question 2

Auditors will perform an analysis of leases using FAS Statement No.13 and FASB ASC 840 criteria to substantiate the accounting treatment.

Accepted Answer

FAS Statement No.13 and FASB ASC 840 provide guidelines for accounting for leases, and auditors use these criteria to ensure that the accounting treatment of leases is appropriate.

Question 3

Auditors often recalculate the present value of capital lease agreements to assess the valuation of recorded liabilities.

Accepted Answer

This statement is true. Auditors may recalculate the present value of capital lease agreements to ensure that the valuation of recorded liabilities is accurate. This helps to ensure that the financial statements provide a fair and accurate representation of the company’s financial position.

Question 4

A bargain purchase option is a good indicator that an arrangement should be accounted for as an operating lease.

Accepted Answer

A bargain purchase option is a provision in a lease contract that allows the lessee to purchase the leased asset at a price that is significantly lower than its fair value. If the bargain purchase option is reasonably certain to be exercised, then the lease arrangement should be accounted for as a finance lease instead of an operating lease.

Question 5

U.S.accounting principles require that lease agreements are treated as capital leases if all of the four criteria apply.

Accepted Answer

U.S. accounting principles (GAAP) require a lease to be classified as a capital lease if any one of the four criteria is met, not all.

Question 6

Bluewire Technologies,Inc.obtained a patent for its MegaK2000 product five years ago and should expense the entire amount of the unamortized balance if MegaK2000 is no longer sold.

Accepted Answer

According to generally accepted accounting principles (GAAP), when a product is no longer sold, any remaining unamortized balance of the related patent should be expensed immediately as a loss. Therefore, Bluewire Technologies, Inc. should expense the entire amount of the unamortized balance if MegaK2000 is no longer sold.

Question 7

The auditor must be aware of management's motivations to present financial information in a certain light when leases are utilized.

Accepted Answer

This is true because management may have certain incentives, such as meeting earnings targets, to structure their lease agreements in a way that would make the financial statements appear more favorable. The auditor needs to be aware of these motivations and exercise professional skepticism in assessing the accounting treatment of leases.

Question 8

The accounting for leases is often misapplied in order to achieve off-balance sheet financing.

Accepted Answer

Off-balance sheet financing allows companies to keep liabilities and assets off of their balance sheets, making their financial statements look stronger than they actually are. Accounting for leases can be manipulated to achieve off-balance sheet financing, which is why it is important for companies to accurately and transparently report their lease obligations.

Question 9

Leases that qualify as operating are expensed as rent each period.

Accepted Answer

Operating leases are expensed as rent each period under the generally accepted accounting principles (GAAP) in the United States. In contrast, capital leases are treated as a purchase of an asset and are not expensed as rent.

Question 10

An auditor will read the footnotes related to discontinued operations to ensure that,among other things,the justification of the decision and the write-down of assets are adequately disclosed.

Accepted Answer

An auditor is responsible for reviewing the footnotes related to discontinued operations to ensure that there is adequate disclosure of the justification of the decision and the write-down of assets. This helps to ensure that the financial statements are free from material misstatements and provide relevant information to stakeholders. Therefore, the statement is true.

Question 11

It is simple for auditors to test the costs capitalized for discovery of natural resources because only successful efforts may be recorded

Accepted Answer

Auditors cannot assume that all costs associated with the discovery of natural resources are successful efforts that can be capitalized. They have to carefully examine the nature of the expenses to determine if they should be expensed or capitalized. Additionally, auditors need to consider the company's accounting policies and the guidance provided by GAAP when testing the costs capitalized for discovery of natural resources.

Question 12

Strong internal control activities in the fixed assets cycle include the use of identification tags secured to assets for proper tracking.

Accepted Answer

The use of identification tags secured to assets is a common practice in the fixed assets cycle to help ensure that assets are properly tracked and accounted for. This is an example of a strong internal control activity that can help prevent loss, theft, or other issues that could impact the value or usefulness of fixed assets. Other internal control activities in this cycle might include regular audits or inventories of fixed assets, implementing robust record-keeping practices, and ensuring that only authorized personnel are able to access or modify information related to fixed assets.

Question 13

Reclamation expenses associated with the use of the land in a mining operation should be estimated,accrued,and allocated to depletion costs over time.

Accepted Answer

Reclamation expenses are a necessary cost associated with the use of land in a mining operation. These expenses should be estimated, accrued, and allocated to the depletion costs over time. This helps to ensure that the costs are properly reflected in the financial statements and that the full cost of mining is accounted for. Therefore, the statement given in the question is true.

Question 14

When testing a client's additions to an asset for research and development,the auditor must remember that such costs should be amortized over the lesser of their legal lives or useful lives.

Accepted Answer

The answer of When testing a client's additions to an...

Question 15

If the beginning balance of property,plant and equipment is established through previous audit work,the test of property accounts usually can be limited to selected tests of property additions and disposals during the year.

Accepted Answer

If the beginning balance of property, plant, and equipment is established through previous audit work, the test of property accounts usually can be limited to selected tests of property additions and disposals during the year. This is because the beginning balance has already been audited and verified, so the emphasis can be on the changes during the current year.

Question 16

Title transfer by the end of a lease is one of the criteria for capital lease recognition.

Accepted Answer

Title transfer by the end of a lease is one of the four criteria for a lease to be recognized as a capital lease under accounting standards (ASC 840 and ASC 842). The other criteria include a bargain purchase option, lease term that is greater than or equal to 75% of the asset's economic life, and present value of lease payments that is greater than or equal to 90% of the asset's fair market value. If the lease meets any one of these criteria, it must be recognized as a capital lease on the lessee's balance sheet, with the leased asset and lease liability recorded as assets and liabilities, respectively.

Question 17

Accounting principles allow goodwill to be held on the books of a company indefinitely and not amortized over time.

Accepted Answer

According to accounting principles, goodwill can be held on the books of a company indefinitely and is not required to be amortized over time. However, companies are required to perform annual impairment tests to ensure that the value of goodwill is not overstated on their balance sheet.

Question 18

Companies often increase depreciation and impairment expenses through manipulation in order to increase profits.

Accepted Answer

Increasing depreciation and impairment expenses would decrease profits, not increase them, as these are costs that reduce net income.

Question 19

The cost of defending patents may not be capitalized.

Accepted Answer

The answer of The cost of defending patents may not...

Question 20

Changes in the ages of equipment may be identified by analyzing depreciation expense as a percent of assets.

Accepted Answer

Depreciation expense is the allocation of the cost of an asset over its useful life. As an asset ages, its useful life decreases and depreciation expense as a percent of assets increases. Therefore, changes in the ages of equipment can be identified by analyzing depreciation expense as a percent of assets.

Quiz 13: Audit of Long-Lived Assets and Related Expense Accounts