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

Accepted Answer

Identifiable payments to cover taxes, insurance, and maintenance should be excluded from future rentals to be capitalized, as they are separate expenses and not part of the rental payments. Only the rental payments should be discounted to present value as part of the purchase price.

Question 2

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

Accepted Answer

Under ASC 842, for a lessor to recognize a lease as a sales-type lease, at least one of the finance lease criteria must be met.

Question 3

When does the lessee report executory costs as an expense?

Accepted Answer

The lessee reports executory costs as an expense when they are incurred by the lessee, regardless of whether the lease is classified as a finance or operating lease. These costs include things like property taxes, insurance, and maintenance expenses. If the costs are spelled out in the lease agreement, it may help the lessee anticipate and budget for them, but they still need to be incurred before they can be expensed.

Question 4

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 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

Accepted Answer

Under ASC 842, for a sales-type lease, the difference between the gross investment in the lease and the sum of the present values of the lease payments (including any residual value guarantee) is recognized as selling profit or loss by the lessor at the lease's inception. This reflects the immediate realization of the profit or loss inherent in the lease at the point when control of the underlying asset is transferred to the lessee.

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

Accepted Answer

Under ASC 842, for a finance lease, the lessee recognizes interest on the lease liability and amortization of the right-of-use asset, which generally results in a front-loaded expense pattern rather than equal monthly rental expenses. For short-term leases (defined as leases with a term of 12 months or less), lessees may elect not to recognize lease assets and liabilities, and instead, recognize lease payments as expense on a straight-line basis over the lease term, which would result in equal monthly rental expenses.

Question 7

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

Accepted Answer

Under ASC 842, the net investment in a sales-type lease is equal to the present value of the gross lease payments. This approach reflects the total amount to be received over the lease term, discounted to present value, which aligns with the standard's focus on recognizing assets and liabilities arising from leases on the balance sheet.

Question 8

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

Accepted Answer

C) In a manner consistent with the lessee's normal depreciation policy for owned assets. According to SFAS No. 13, when a lease contains a bargain purchase option, the leased asset should be amortized in a manner consistent with the lessee's normal depreciation policy for owned assets, reflecting the assumption that the asset will be purchased and thus become owned by the lessee.

Question 9

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

Accepted Answer

According to ASC 842, if the lease term is a major part of the asset's economic life, not near the end of the asset's life, it meets one of the lease capitalization criteria.

Question 10

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

Accepted Answer

Under ASC 842, the lessee should use the lower of its incremental borrowing rate or the implicit rate of the lessor, assuming the implicit rate is known to the lessee, to compute the present value of the minimum lease payments.

Question 11

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

Accepted Answer

Lessees may prefer to account for their leases as short-term leases because it decreases the amount of liability reported on their financial statements. This can improve their financial ratios and reduce perceived risk to investors. However, it may also result in higher lease payments over time.

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

Accepted Answer

According to the criteria listed, 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, the lessee must classify the lease as an operating lease. This is because the lease is not considered to transfer risks and rewards of ownership to the lessee, and as a result, the lessee does not record the leased asset as an owned asset and the lease payments are recorded as rent expense over the term of the lease. The amount of unguaranteed salvage value, interest rate used, or the lessee's incremental borrowing rate are not relevant factors in determining the classification of the lease if it already meets the criteria for 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

Accepted Answer

Certain lease agreements that effectively transfer the risks and rewards of ownership to the lessee must be accounted for as purchases. This is because the lessee gains effective control of the right of use of the identified property, and as such, the lease should be treated as a purchase of that property.

Question 14

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

Accepted Answer

Under ASC 842, a lease should not be classified as a finance lease by the lessee if it does not meet any of the five criteria set forth for such classification. One of these criteria is that the lease term is for the major part of the remaining economic life of the underlying asset. If the asset's useful life is 20 years and the lease occurs when the asset is already 26 years old, the lease term does not cover a major part of the asset's economic life, indicating it should not be classified as a finance lease.

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

Accepted Answer

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

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

Accepted Answer

Under ASC 842, finance lease payments are structured such that the interest expense decreases over time while the principal repayment increases. Therefore, the portion of the payment reducing the obligation in the third year will be more than in the second year.

Question 17

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

Accepted Answer

The primary difference between a direct-financing lease and a sales-type lease under ASC 842 is whether the five lease recognition criteria are met. In a sales-type lease, the lessor recognizes a profit or loss at lease inception, while in a direct-financing lease, the lessor only recognizes interest income over the term of the lease. The amount of depreciation recorded each year by the lessor, the allocation of initial direct costs by the lessor, and the manner in which rental receipts are recorded as rental income are all secondary differences between the two lease types.

Question 18

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 is because lessors need to determine how to recognize and allocate lease income and expenses over time, particularly for leases that involve complicated payment structures or options to renew or purchase the leased asset at the end of the lease term. Off-balance sheet financing (choice A) is a concern for both lessees and lessors, but it is not the primary accounting issue for lessors. Treating the lease in the same manner as the lessee does (choice C) is not an accounting issue at all, but rather a question of whether the lessor should follow the same accounting rules as the lessee. Determining whether the lease is a sales-type lease or a direct financing lease (choice D) is one aspect of revenue recognition and expense allocation, but it is not as central to lessors as it is to lessees.

Question 19

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

Accepted Answer

The primary accounting issue for lessees that lead to the issuance of ASU 2016-02 was off-balance sheet financing. Prior to the issuance of this standard, lessees were able to structure leases in a way that kept the underlying asset and associated lease obligations off their balance sheets, which could create a misleading picture of the company's financial position. ASU 2016-02 requires almost all leases to be recognized on the balance sheet, which improves transparency and comparability of financial statements.

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)
Interest Expense     Reduction of Liability

Accepted Answer

The answer of A six-year-finance lease entered into on December...

Quiz 13: Leases