Deck 13: Leases

Question 1

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

A) Included in the future rentals to be capitalized
B) Excluded from future rentals to be capitalized
C) Capitalized but at a different discount rate and recorded in a different account than future rental payments
D) Capitalized but at a different discount rate and for a relevant period that tends to be different than that for future rental payments

Answer 1

B

Question 2

For the lessor to recognize a lease as a sales-type lease, under ASC 842, the following must occur.

A) At least one of the finance lease criteria is met, at least one of the certainty criteria is met, and there is a manufacturer or dealer's profit.
B) At least one of the finance lease criteria is met.
C) More than one of the finance lease criteria are met, both certainty criteria are met, and there is a manufacturer or dealer's profit.
D) Only one of the finance lease criteria is met, both certainty criteria are met, and there is a manufacturer or dealer's profit.

Answer 2

B

Question 3

When does the lessee report executory costs as an expense?

A) When they are spelled out in the lease agreement.
B) Only when they are incurred by the lessee and the lease is classified as a finance lease.
C) When they are incurred by the lessee.
D) Only when they are incurred by the lessee and the lease is classified as an operating lease.

Answer 3

C

Question 4

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

A) Zero
B) The absolute sum of the lease payments
C) The present value of the sum of the lease payments discounted at an appropriate rate
D) The book value of the asset on the lessor's books at the date of the inception of the lease

Question 5

Under ASC 842, 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

A) In full at the lease's expiration
B) In full at the lease's inception
C) Over the period of the lease using the interest method of amortization
D) Over the period of the lease using the straight-line method of amortization

Question 6

Under ASC 842, equal monthly rental payments for a particular lease should be charged to rental expense by the lessee for which of the following? Finance lease Short-term lease

A) Yes No
B) Yes Yes
C) No No
D) No Yes

Question 7

For a sales-type lease, under ASC 842, the net investment is equal to

A) The present value of the minimum lease payments plus executor costs.
B) The net investment minus unearned income.
C) Sales minus the gross profit recognized on the sale.
D) The present value of the gross lease payments.

Question 8

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

A) Over the period of the lease using the interest method of amortization
B) Over the period of the lease using the straight-line method of amortization
C) In a manner consistent with the lessee's normal depreciation policy for owned assets
D) In a manner consistent with the lessee's normal depreciation policy for owned assets except that the period of amortization should be the lease term

Question 9

Which of the following is one of the lease capitalization criteria under ASC 842?

A) The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property
B) The lease transfers ownership of the property to the lessor
C) The lease contains a purchase option
D) The lease term is a major part of the asset's economic life, not near the end of the asset's life

Question 10

In computing the present value of the minimum lease payments under ASC 842, the lessee should

A) Use its incremental borrowing rate in all cases
B) Use either its incremental borrowing rate or the implicit rate of the lessor, whichever is higher, assuming that the implicit rate is known to the lessee
C) 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
D) Use the implicit rate in all cases.

Question 11

Lessees prefer to account for their leases as short-term leases because:

A) This decreases the amount of liability reported
B) This increases their debt to total equity ratio
C) This decreases the income tax expense.
D) This increases the amount of total assets.

Question 12

When a lease contract does not transfer title to the lessee, there is no purchase option reasonably certain to be exercised, and the lease term is not the major part of the asset's remaining economic life

A) The lessee must classify the lease as an operating lease.
B) The amount of unguaranteed salvage value, if any, determines whether the lease is a finance lease or an operating lease.
C) The interest rate used to determine the present value of the minimum lease payments also determines whether the lease is a finance lease or an operating lease.
D) The lessee must use the greater of the lessor's rate of return or the lessee's incremental borrowing rate to determine whether the lease is a finance lease or an operating lease.

Question 13

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

A) Effectively controls the right of use of identified property
B) Is an example of form over substance
C) Provides the use of the leased asset to the lessee for a limited period of time
D) Must be recorded in accordance with the concept of cause and effect

Question 14

Which of the following would indicate that the lessee should not classify a lease as a finance lease under ASC 842?

A) The fair value of the leased asset is $100,000 and the present value of the minimum lease payments is $95,000.
B) The lease provides for no unguaranteed salvage value.
C) The lessee has the option to purchase the leased asset in 4 years for $2 when the asset's salvage value is expected to be $20,000.
D) The asset's useful life is 20 years; a 4-year lease occurs when the asset is 26 years old.

Question 15

Under the finance method of accounting for leases, under ASC 842, the excess of aggregate rentals over the cost of leased property should be recognized as revenue of the lessor

A) In increasing amounts during the term of the lease
B) In constant amounts during the term of the lease
C) In decreasing amounts during the term of the lease
D) After the cost of leased property has been fully recovered through rentals

Question 16

For a six-year finance lease, under ASC 842, the portion of the minimum lease payment in the third year applicable to the reduction of the obligation should be

A) Less than in the second year
B) More than in the second year
C) The same as in the fourth year
D) More than in the fourth year

Question 17

The primary difference between a direct-financing lease and a sales-type lease under ASC 842 is the

A) Whether the five lease recognition criteria are met
B) Amount of the depreciation recorded each year by the lessor
C) Allocation of initial direct costs by the lessor to periods benefited by the lease arrangements
D) Manner in which rental receipts are recorded as rental income

Question 18

What is the primary accounting issue for lessors?

A) Off-balance sheet financing.
B) Revenue recognition and expense allocation over the lease term.
C) Treating the lease in the same manner as the lessee does.
D) Determining whether the lease is a sales-type lease or a direct financing lease.

Question 19

What was the primary accounting issue for lessees that lead to the issuance of ASU 2016-02?

A) Recording interest expense on the lease obligation.
B) Determining whether the lease meets the 90% of fair value test.
C) Off-balance sheet financing.
D) The measurement of the leased asset under a finance lease.

Question 20

A six-year-finance lease entered into on December 31, 2020, specified equal minimum annual lease payments due on December 31, 2021. Minimum payment applicable to which of the following increased over the corresponding December 31, 2021, minimum payment? (The company is applying SFAS No. 13) Reduction of
Interest Expense Liability

A) Yes Yes
B) Yes No
C) No Yes
D) No No

Question 21

How is the recorded amount of a lessee finance lease determined under ASC 842?

Question 22

From the lessee's perspective, in the earlier years of a lease,

A) Operating leases will cause debt to increase, compared to finance leases.
B) Operating leases will cause income to increase, compared to finance leases.
C) Finance leases will cause debt to increase, compared to operating leases.
D) Finance leases will enable the lessee to report higher income, compared to operating leases.

Question 23

What is the difference between a sales-type and a direct financing type of finance lease under ASC 842?

Question 24

The major difference between ASU 2016-02 and IFRS No. 16 is

A) All leases must be recorded as finance leases by lessees under ASU 2016-02; whereas, some leases may be recorded as operating leases by lessees under IFRS No. 16.
B) All leases must be recorded as finance leases by lessees under IFRS No. 16; whereas, some leases may be recorded as operating leases by lessees under ASU 2016-02
C) All leases must be recorded as finance leases by lessors under ASU 2016-02; whereas, some leases may be recorded as operating leases by lessors under IFRS No. 16
D) All leases must be recorded as finance leases by lessors under IFRS No. 16; whereas, some leases may be recorded as operating leases by lessors under ASU 2016-02.

Question 25

List some advantages of leasing

Question 26

Under the provisions of ASC 842 sale‐leaseback accounting is virtually eliminated as an off‐balance sheet financing proposition, because both the seller‐lessee and a buyer‐lessor will apply the provisions of FASB ASC 602 Revenue Recognition to determine whether a sale has occurred. Accordingly, which of the following is not a criterion that must be met to record a sale-leaseback a sale?

A) The transaction meets the sale guidance in the new revenue recognition standard.
B) The transaction is a leveraged lease
C) The leaseback is not a finance or a sales‐type lease
D) If there is a repurchase option, the exercise price is at the asset's fair value at the time of exercise, and alternative assets that are substantially the same as the transferred asset are readily available in the marketplace.

Question 27

The key difference between ASC 842 and SFAS No. 13 in accounting for leases by lessees is

A) The recognition of a right‐to‐use asset (ROU) and lease liability on the statement of financial position for those leases previously classified as operating leases under SFAS No. 13
B) Leases will be measured at their fair value by lessees
C) The classification of a lease as a finance by a lessee is based on a completely new set of criteria than was used in SFAS No. 13.
D) There are no major differences between the two standards in accounting for leases by lessees.

Question 28

In an operating lease, the lessee records

A) Amortization expense and lease expense.
B) Interest expense.
C) Lease expense.
D) Amortization expense.

Question 29

In a finance lease, the lessee records

A) Interest expense only.
B) Amortization expense only.
C) Lease expense only.
D) Amortization expense and interest expense.

Question 30

What is the definition of a lease under the provisions of ASU 2016-02?

Question 31

Which of the following is not one of the lease classification tests?

A) Transfer of ownership
B) Collectibility
C) Purchase option
D) Lease term

Question 32

List the five criteria for recording a lease transaction as a finance lease according to ASC 842.

Question 33

The amount to be recorded as the cost of an asset under finance lease is equal to the

A) Present value of the lease payments plus the present value of any unguaranteed residual value.
B) Carrying value of the asset on the lessor's books.
C) Present value of the lease payments.
D) Present value of the lease payments or the fair value of the asset, whichever is lower.

Question 34

Under the provisions of ASC 842, which of the following is not required in a lease modification when the lease payments are required to be remeasured?

A) Any variable lease payments that are based on a rate or index will need to be remeasured.
B) The total lease liability is remeasured
C) The remeasured lease must be subsequently recorded as an operating lease
D) The lessee is generally required to use an updated discount rate.

Question 35

Define the following:
a. Finance lease
A finance lease is based on the view that the lease constitutes an agreement through which the lessor finances the acquisition of assets by the lessee. Consequently, finance leases are in-substance installment purchases of assets.
b. Operating lease
An operating lease is based on the view that the lease constitutes a rental agreement between the lessor and lessee.

Question 36

Under the provisions of ASC 842

A) Accounting by lessors for leases is virtually unchanged from what was required by SFAS No. 13
B) Accounting by lessees for leases is virtually unchanged from what was required by SFAS No. 13
C) Accounting by lessors for leases re is significantly changed from what was required by SFAS No. 13
D) Accounting by lessees and lessors for leases is virtually unchanged from what was required by SFAS No. 13.

Question 37

In computing the present value of the lease payments, the lessee should

A) Use the implicit rate in all cases.
B) Use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee/
C) Use its incremental borrowing rate in all cases.
D) Use both its incremental borrowing rate and the implicit rate of the lessor, assuming that the implicit rate is known to the lessee.

Question 38

Under the provisions of ASC 842 which of the following is not a criterion to use in determining whether a lessee should classify a lease as a finance lease?

A) The lease transfers ownership of the underlying asset to the lessee by the end of the lease term
B) The lease grants the lessee an option to purchase the underlying asset the lessee is reasonably certain to exercise
C) The lease term is for the major part of the remaining economic life of the underlying asset
D) The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds 50 percent of the fair value of the underlying asset.

Question 39

The classifications of a lease by the lessee are

A) Operating and finance leases.
B) Operating, sales, and finance leases.
C) Operating and leveraged leases.
D) None of these answers are correct.

Question 40

What is a leveraged lease? How do lessees and lessors record leveraged leases under ASC 842?

Question 41

How do lessees and lessors allocate the contract price to separate lease and nonlease components under the provisions of ASU 2016-02?

Question 42

On January 1, 2020, Abreau Company contracts to lease equipment for 5 years, agreeing to make a payment of $120,987 at the beginning of each year, starting January 1, 2020. The leased equipment is to be capitalized at $550,000. The asset is to be amortized on a double-declining-balance basis, and the obligation is to be reduced on an effective-interest basis. Abreau's incremental borrowing rate is 6%, and the implicit rate in the lease is 5%, which is known by Abreau. Title to the equipment transfers to Abreau at the end of the lease. The asset has an estimated useful life of 5 years and no residual value.

Question 43

How do lessors determine whether to record a lease as: 1. Sales-type, 2. Direct financing or 3. Operating, under the provisions of ASU 2016-02?

Question 44

Under the provisions of SFAS No. 13, the difference between a sales-type and a direct financing lease for a lessor was the existence of manufacturer's or dealer's profit at (or loss) the inception of the lease. Under FASB ASC 842 this criterion no longer exists. What are the FASB ASC criteria for classifying a lease as either direct financing or sales-type?

Question 45

What are the two classifications of leases for lessees under ASU 2016-02 and how is that classification determined?

Question 46

Discuss the difference between a finance lease and an operating lease from a lessee's perspective.

Question 47

Lopez Company leases a new machine to Abbott Corporation. The machine has a cost of $70,000 and fair value of $95,000. Under the 3-year, non-cancelable contract, Abbott will receive title to the machine at the end of the lease. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2020. Lopez expects to earn an 8% return on its investment, and this implicit rate is known by Abbott. The annual rentals are payable on each December 31, beginning December 31, 2020. How should this lease be recorded by Lopez and Abbott?

Question 48

What is a lease modification and what is the proper accounting treatment for lease modifications under ASU 2016-02?

Question 49

Burdi Leasing Company agrees to lease equipment to Hanson Corporation on January 1, 2020. (Its fiscal year ends on December 31st each year) The following information relates to the lease agreement.