ACC 305 WEEK 7 QUIZ 4
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ACC 305 WEEK 7 QUIZ 4
ACC 305 Week 7 Quiz 4 – STR NEW
TRUE-FALSE—Conceptual
1. Leasing equipment reduces the risk of
obsolescence to the lessee, and passes the risk of residual value to the
lessor.
2. The FASB agrees with the
capitalization approach and requires companies to capitalize all long-term
leases.
3. A lease that contains a purchase
option must be capitalized by the lessee.
4. Executory costs should be excluded by
the lessee in computing the present value of the minimum lease payments.
5. A capitalized leased asset is always
depreciated over the term of the lease by the lessee.
6. A lessee records interest expense in
both a capital lease and an operating lease.
7. A benefit of leasing to the lessor is
the return of the leased property at the end of the lease term.
8. The distinction between a
direct-financing lease and a sales-type lease is the presence or absence of a
transfer of title.
9. Lessors classify and account for all
leases that don’t qualify as sales-type leases as operating leases.
10. Direct-financing leases are in
substance the financing of an asset purchase by the lessee.
11. Under the operating method, the
lessor records each rental receipt as part interest revenue and part rental
revenue.
12. In computing the annual lease
payments, the lessor deducts only a guaranteed residual value from the fair
value of a leased asset.
13. When the lessee agrees to make up
any deficiency below a stated amount that the lessor realizes in residual
value, that stated amount is the guaranteed residual value.
14. Both a guaranteed and an
unguaranteed residual value affect the lessee’s computation of amounts
capitalized as a leased asset.
15. From the lessee’s viewpoint, an unguaranteed
residual value is the same as no residual value in terms of computing the
minimum lease payments.
16. The lessor will recover a greater
net investment if the residual value is guaranteed instead of unguaranteed.
17. The primary difference between a
direct-financing lease and a sales-type lease is the manufacturer’s or dealer’s
gross profit.
18. The gross profit amount in a
sales-type lease is greater when a guaranteed residual value exists.
19. Companies must periodically review
the estimated unguaranteed residual value in a sales-type lease.
20. The FASB requires lessees and
lessors to disclose certain information about leases in their financial
statements or in the notes.
MULTIPLE CHOICE—Conceptual
21. Major reasons why a company may
become involved in leasing to other companies is (are)
a. interest revenue.
b. high residual values.
c. tax incentives.
d. all of these.
22. Which of the following is an
advantage of leasing?
a. Off-balance-sheet financing
b. Less costly financing
c. 100% financing at fixed rates
d. All of these
23. Which of the following best
describes current practice in accounting for leases?
a. Leases are not capitalized.
b. Leases similar to installment purchases are
capitalized.
c. All long-term leases are capitalized.
d. All leases are capitalized.
24. While only certain leases are
currently accounted for as a sale or purchase, there is theoretic justification
for considering all leases to be sales or purchases. The principal reason that
supports this idea is that
a. all leases are generally for the economic life of
the property and the residual value of the property at the end of the lease is
minimal.
b. at the end of the lease the property usually can
be purchased by the lessee.
c. a lease reflects the purchase or sale of a
quantifiable right to the use of property.
d. during the life of the lease the lessee can
effectively treat the property as if it were owned by the lessee.
S25. An essential element of a lease
conveyance is that the
a. lessor conveys less than his or her total
interest in the property.
b. lessee provides a sinking fund equal to one
year’s lease payments.
c. property that is the subject of the lease
agreement must be held for sale by the lessor prior to the drafting of the
lease agreement.
d. term of the lease is substantially equal to the
economic life of the leased property.
S26. What impact does a bargain purchase
option have on the present value of the minimum lease payments computed by the
lessee?
a. No impact as the option does not enter into the
transaction until the end of the lease term.
b. The lessee must increase the present value of the
minimum lease payments by the present value of the option price.
c. The lessee must decrease the present value of the
minimum lease payments by the present value of the option price.
d. The minimum lease payments would be increased by
the present value of the option price if, at the time of the lease agreement,
it appeared certain that the lessee would exercise the option at the end of the
lease and purchase the asset at the option price.
P27. The amount to be recorded as the
cost of an asset under capital lease is equal to the
a. present value of the minimum lease payments.
b. present value of the minimum lease payments or
the fair value of the asset, whichever is lower.
c. present value of the minimum lease payments plus
the present value of any unguaranteed residual value.
d. carrying value of the asset on the lessor’s
books.
28. The methods of accounting for a
lease by the lessee are
a. operating and capital lease methods.
b. operating, sales, and capital lease methods.
c. operating and leveraged lease methods.
d. none of these.
29. 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.
30. Minimum lease payments may include a
a. penalty for failure to renew.
b. bargain purchase option.
c. guaranteed residual value.
d. any of these.
31. Executory costs include
a. maintenance.
b. property taxes.
c. insurance.
d. all of these.
32. 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.
33. 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.
34. In the earlier years of a lease,
from the lessee’s perspective, 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.
P35. 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.
36. 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
37. 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
38. In a lease that is appropriately
recorded as a direct-financing lease by the lessor, 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.
S39. 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.
S40. 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.
41. When lessors account for residual
values related to leased assets, they
a. always 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 above are true with regard to lessors
and residual values.
42. 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 above are true with regard to the
initial direct costs of leasing.
S43. 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 the inception of the lease.
d. allocation of initial direct costs by the lessor
to periods benefited by the lease arrangements.
P44. 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.
45. 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.
46. Which of the following statements is
correct?
a. In a direct-financing lease, initial direct costs
are added to the net investment in the lease.
b. In a sales-type lease, 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.
47. 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.
48. 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.
*49. If the lease in a sale-leaseback
transaction meets one of the four leasing criteria and is therefore accounted
for as a capital lease, who records the asset on its books and which party
records interest expense during the lease period?
Party recording the
Party recording
asset on its books
interest expense
a.
Seller-lessee
Purchaser-lessor
b.
Purchaser-lessor
Seller-lessee
c.
Purchaser-lessor
Purchaser-lessor
d.
Seller-lessee
Seller-lessee
*50. In a sale-leaseback transaction
where none of the four leasing criteria are satisfied, which of the following
is false?
a. The seller-lessee removes the asset from its
books.
b. The purchaser-lessor records a gain.
c. The seller-lessee records the lease as an operating
lease.
d. All of the above are false statements.
*51. When a company sells property and
then leases it back, any gain on the sale should usually be
a. recognized in the current year.
b. recognized as a prior period adjustment.
c. recognized at the end of the lease.
d. deferred and recognized as income over the term
of the lease.
All Questions Included.
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