To avoid leased asset capitalization, companies can devise lease agreements that fail to satisfy any of the four leasing criteria. Which of the following is not one of the ways to accomplish this goal?

To avoid leased asset capitalization, companies can devise lease agreements that fail to satisfy any of the four leasing criteria. Which of the following is not one of the ways to accomplish this goal?

a. Lessee uses a higher interest rate than that used by lessor.
b. Set the lease term at something less than 75% of the estimated useful life of the property.
c. Write in a bargain purchase option.
d. Use a third party to guarantee the asset's residual value.


Answer: Write in a bargain purchase option

The Lease Liability account should be disclosed as

The Lease Liability account should be disclosed as

a. all current liabilities.
b. all noncurrent liabilities.
c. current portions in current liabilities and the remainder in noncurrent liabilities.
d. deferred credits.


Answer: current portions in current liabilities and the remainder in noncurrent liabilities

Which of the following statements is correct?

Which of the following statements is correct?

a. For direct-financing leases, initial direct costs are added to the net investment in the lease.
b. For sales-type leases, initial direct costs are expensed in the year of incurrence.
c. For operating leases, initial direct costs are deferred and allocated over the lease term.
d. All of these answers are correct.


Answer: All of these answers are correct

For a sales-type lease,

For a sales-type lease,

a. the sales price includes the present value of the unguaranteed residual value.
b. the present value of the guaranteed residual value is deducted to determine the cost of goods sold.
c. the gross profit will be the same whether the residual value is guaranteed or unguaranteed.
d. None of these answers are correct.


Answer: the gross profit will be the same whether the residual value is guaranteed or unguaranteed

A lessor with a sales-type lease involving an unguaranteed residual value available to the lessor at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts?

A lessor with a sales-type lease involving an unguaranteed residual value available to the lessor at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts?

a. The minimum lease payments plus the unguaranteed residual value.
b. The present value of the minimum lease payments.
c. The cost of the asset to the lessor, less the present value of any unguaranteed residual value.
d. The present value of the minimum lease payments plus the present value of the unguaranteed residual value.


Answer: The present value of the minimum lease payments

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

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

a. manner in which rental receipts are recorded as rental income.
b. amount of the depreciation recorded each year by the lessor.
c. recognition of the manufacturer's or dealer's profit at (or loss) the inception of the lease.
d. allocation of initial direct costs by the lessor to periods benefited by the lease arrangements.


Answer: recognition of the manufacturer's or dealer's profit at (or loss) the inception of the lease

The initial direct costs of leasing

The initial direct costs of leasing

a. are generally borne by the lessee.
b. include incremental costs related to internal activities of leasing, and internal costs related to costs paid to external third parties for originating a lease arrangement.
c. are expensed in the period of the sale under a sales-type lease.
d. All of the answers are true with regard to the initial direct costs of leasing.


Answer: are expensed in the period of the sale under a sales-type lease

When lessors account for residual values related to leased assets, they

When lessors account for residual values related to leased assets, they

a. include the residual value because they always assume the residual value will be realized.
b. include the unguaranteed residual value in sales revenue.
c. recognize more gross profit on a sales-type lease with a guaranteed residual value than on a sales-type lease with an unguaranteed residual value.
d. All of the answers are true with regard to lessors and residual values.


Answer: include the residual value because they always assume the residual value will be realized

If the residual value of a leased asset is guaranteed by a third party

If the residual value of a leased asset is guaranteed by a third party

a. it is treated by the lessee as no residual value.
b. the third party is also liable for any lease payments not paid by the lessee.
c. the net investment to be recovered by the lessor is reduced.
d. it is treated by the lessee as an additional payment and by the lessor as realized at the end of the lease term.


Answer: it is treated by the lessee as an additional payment and by the lessor as realized at the end of the lease term

In order to properly record a direct-financing lease, the lessor needs to know how to calculate the lease receivable. The lease receivable in a direct-financing lease is best defined as

In order to properly record a direct-financing lease, the lessor needs to know how to calculate the lease receivable. The lease receivable in a direct-financing lease is best defined as

a. the amount of funds the lessor has tied up in the asset which is the subject of the direct-financing lease.
b. the difference between the lease payments receivable and the fair value of the leased property.
c. the present value of minimum lease payments.
d. the total book value of the asset less any accumulated depreciation recorded by the lessor prior to the lease agreement.


Answer: the present value of minimum lease payments

In a lease that is appropriately recorded as a direct-financing lease by the lessor, the unearned income

In a lease that is appropriately recorded as a direct-financing lease by the lessor, the unearned income

a. should be amortized over the period of the lease using the effective interest method.
b. should be amortized over the period of the lease using the straight-line method.
c. does not arise.
d. should be recognized at the lease's expiration.


Answer: should be amortized over the period of the lease using the effective interest method

Which of the following would not be included in the Lease Receivable account?

Which of the following would not be included in the Lease Receivable account?

a. Guaranteed residual value
b. Unguaranteed residual value
c. A bargain purchase option
d. All would be included


Answer: All would be included

Based solely upon the following sets of circumstances indicated below, which set gives rise to a sales-type or direct-financing lease of a lessor?

Based solely upon the following sets of circumstances indicated below, which set gives rise to a sales-type or direct-financing lease of a lessor?

Transfers Ownership Contains Bargain Collectibility of Lease Any Important
By End Of Lease? Purchase Option? Payments Assured? Uncertainties?


a. No Yes Yes No
b. Yes No No No
c. Yes No No Yes
d. No Yes Yes Yes


Answer: No Yes Yes No

A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over the

A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over the

a. asset's remaining economic life.
b. term of the lease.
c. life of the asset or the term of the lease, whichever is shorter.
d. life of the asset or the term of the lease, whichever is longer.


Answer: asset's remaining economic life.

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

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

a. capital method will enable the lessee to report higher income, compared to the operating method.
b. capital method will cause debt to increase, compared to the operating method.
c. operating method will cause income to decrease, compared to the capital method.
d. operating method will cause debt to increase, compared to the capital method.


Answer: capital method will cause debt to increase, compared to the operating method

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

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

a. it increases their debt to total equity ratio.
b. it decreases the income tax expense.
c. it increases the amount of total assets.
d. it decreases the amount of liability reported.


Answer: it decreases the amount of liability reported

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

In computing the present value of the minimum lease payments, 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. None of these answers are correct.


Answer: 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

In computing depreciation of a leased asset, the lessee should subtract

In computing depreciation of a leased asset, the lessee should subtract

a. a guaranteed residual value and depreciate over the term of the lease.
b. an unguaranteed residual value and depreciate over the term of the lease.
c. a guaranteed residual value and depreciate over the life of the asset.
d. an unguaranteed residual value and depreciate over the life of the asset.


Answer: a guaranteed residual value and depreciate over the term of the lease

Minimum lease payments may include a

Minimum lease payments may include a

a. penalty for failure to renew.
b. bargain purchase option.
c. guaranteed residual value.
d. any of these.


Answer: any of these

Which of the following is a correct statement of one of the capitalization criteria?

Which of the following is a correct statement of one of the capitalization criteria?

a. The lease transfers ownership of the property to the lessor.
b. The lease contains a purchase option.
c. The lease term is equal to or more than 75% of the estimated economic life of the leased property.
d. The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property.


Answer: The lease contains a purchase option