Question 1

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

Accepted Answer

According to generally accepted accounting principles, a lease agreement should be accounted for as a purchase if it effectively conveys all of the benefits and risks incident to the ownership of property. This treatment is based on the principle that the lessee effectively becomes the owner of the asset and should record it as such on their financial statements.

Question 2

A six-year-capital lease entered into on December 31,2016,specified equal minimum annual lease payments due on December 31,2017.Minimum payment applicable to which of the following increased over the corresponding December 31,2017,minimum payment? The company is applying SFAS No.13) Reduction of
Interest Expense Liability

Accepted Answer

Under SFAS No.13, the interest expense component of a capital lease payment decreases over time as the outstanding lease liability decreases, while the liability itself decreases with each payment.

Question 3

Which of the following is one of the lease capitalization criteria under SFAS No.13?

Accepted Answer

According to SFAS No.13, one of the lease capitalization criteria is that the lease term is equal to or more than 75% of the estimated economic life of the leased property. Therefore, option D is the correct answer. Option A is incorrect because it pertains to the threshold for determining the use of capital or operating lease, not lease capitalization. Option B is incorrect because it is not possible for a lease to transfer ownership to the lessor. Option C is incorrect because a purchase option may or may not be present in a capital lease.

Question 4

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

Accepted Answer

Identifiable payments to cover taxes, insurance, and maintenance should be excluded from future rentals to be capitalized as they are separate from the rental payments and should be accounted for separately.

Question 5

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,under SFAS No.13: Transfers Contains
Ownership bargain
By end of purchase
Lease? Provision?

Accepted Answer

The ownership transfer and ownership bargain indicate a sales-type lease, while the provision of lease indicates a direct financing lease. Therefore, both conditions are present in option C, making it the correct choice. None of the other options includes both conditions.

Question 6

For the lessor to recognize a lease as a sales-type lease,under SFAS No.13,the following must occur.

Accepted Answer

According to SFAS No.13, for a lease to be recognized as a sales-type lease, at least one of the capital lease criteria must be met, both certainty criteria must be met, and a manufacturer or dealer's profit must be involved. Choice B is the only option that mentions both certainty criteria and manufacturer or dealer's profit, making it the correct choice.

Question 7

What is the primary accounting issue for lessors?

Accepted Answer

The primary accounting issue for lessors is revenue recognition and expense allocation over the lease term. This involves determining the appropriate method for recognizing lease revenue and allocating lease expenses over the term of the lease. Lessors must also consider the collectibility of lease payments, residual value guarantees, and the classification of the lease as a sales-type lease or a direct financing lease. However, these issues all ultimately tie back to the primary concern of revenue recognition and expense allocation.

Question 8

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.

Accepted Answer

The answer of When a lease contract does not transfer...

Question 9

What is the primary accounting issue for lessees?

Accepted Answer

The primary accounting issue for lessees is off-balance sheet financing, as leases can be structured to keep liabilities off the balance sheet, affecting financial ratios and perceptions of financial health.

Question 10

The appropriate valuation of an operating lease on the statement of financial position of a lessee is

Accepted Answer

The answer of The appropriate valuation of an operating lease...

Question 11

Under the capital method of accounting for leases,under SFAS No.13,the excess of aggregate rentals over the cost of leased property should be recognized as revenue of the lessor

Accepted Answer

The answer of Under the capital method of accounting for...

Question 12

The primary difference between a direct-financing lease and a sales-type lease under SFAS No.13 is the

Accepted Answer

The primary difference between a direct-financing lease and a sales-type lease under SFAS No.13 is the recognition of the manufacturer's or dealer's profit at the inception of the lease. In a direct-financing lease, the lessor only recognizes interest income over the lease term, while in a sales-type lease, the lessor recognizes both interest income and profit at the inception of the lease. The other options (B, C, and D) are not significant differences between these two types of leases.

Question 13

Under SFAS No.13,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

Accepted Answer

Under SFAS No.13, equal monthly rental payments are charged to rental expense by the lessee for an operating lease, not a capital lease. In a capital lease, the lessee records an asset and a liability, and the expense is recognized through depreciation and interest expense, not as rental expense.

Question 14

Lessees prefer to account for their leases as operating leases because:

Accepted Answer

Lessees prefer to account for their leases as operating leases because it decreases the amount of liability reported. This is because operating leases are not recorded on the balance sheet as a liability, unlike finance leases. As a result, it leads to a lower reported debt-to-equity ratio, which is desirable for the companies as it indicates a lower financial risk. Additionally, this can lead to tax advantages as well, as lease payments are treated as operating expenses and are tax-deductible.

Question 15

When does the lessee report executory costs as an expense?

Accepted Answer

Executory costs are expenses that are not included in the lease payments but are incurred by the lessee in order to use the leased asset. These costs should be expensed by the lessee as they are incurred, regardless of whether the lease is classified as operating or capital. Therefore, the correct answer is C, which states that the lessee should report executory costs as an expense when they are incurred.

Question 16

For a sales-type lease,under SFAS No.13,the net investment is equal to

Accepted Answer

The net investment in a sales-type lease under SFAS No.13 is calculated as the present value of the gross investment, which includes the present value of the minimum lease payments and any unguaranteed residual value.

Question 17

Under SFAS No.13,for 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

Accepted Answer

For a sales-type lease under SFAS No.13, the difference between the gross investment in the lease and the sum of the present values of the components of the gross investment should be recognized as income in full at the lease's inception. This is because the lessor has essentially sold the leased asset to the lessee and is recognizing the profit upfront.

Question 18

For a six-year capital lease,under SFAS No.13,the portion of the minimum lease payment in the third year applicable to the reduction of the obligation should be

Accepted Answer

According to SFAS No.13, the portion of the minimum lease payment that applies to the reduction of the obligation is calculated using the interest method. In the early years of a lease, the interest component is higher, and as the lease progresses, the principal component increases. Therefore, the portion of the minimum lease payment applicable to the reduction of the obligation should be more in the third year than in the second year.

Question 19

Office equipment recorded under a capital lease containing a bargain purchase option should be amortized under SFAS No.13

Accepted Answer

Under SFAS No.13, office equipment recorded under a capital lease with a bargain purchase option should be amortized in a manner consistent with the lessee's normal depreciation policy for owned assets, typically over the useful life of the asset.

Question 20

In computing the present value of the minimum lease payments under SFAS No.13,the lessee should

Accepted Answer

The lessee should use the lower of its incremental borrowing rate or the implicit rate of the lessor, if the implicit rate is known, to compute the present value of the minimum lease payments.

Quiz 13: Leases