Chapter 16—LEASES
TRUE/FALSE
1. Leases have been the subject of more accounting standards than any other single topic.
2. The first lease accounting standard was issued in 1966.
3. It was in the 1940s that accounting policy-makers first responded to the lease accounting
problem.
4. Prior to ARB 38, the accounting procedure for lease payments was to record them as periodic
revenues for lessors and as purchases of assets for lessees.
5. Some capital leases are treated as loans with income realized through implicit interest in each
lease payment.
6. The legal form of a lease is an executory, or unperformed, contract.
7. If a lease is interpreted as a mutually unperformed executory contract, it can be argued that an
asset and liability do not exist for the lessee.
8. Legal remedies available to lessors in the event of lessee default treat leases like unilaterally
unperformed executory contracts.
9. There are no real differences between true leases and purchase arrangements.
10. ARB 38 recommended that where it was obvious a lease contract was in substance a purchase, an
asset, but not a liability, should be recognized in the lessee’s balance sheet.
11. Only leases that would be considered true leases in the eyes of the law are capitalized.
Chapter 16—LEASES
12. Classifying leases as either operating or capital leases is an example of attempting to establish
finite uniformity.
13. One of the major arguments for lease capitalization was verifiability.
14. An argument against lease capitalization was that the use of present value discounting techniques
introduced less reliable accounting numbers into the financial statements.
15. A basic issue with lessor capitalization is symmetry with lessee accounting.
16. With financing-type leases, there is no sales revenue, only interest revenue earned from the debt
financing.
17. The concept of full payout refers to the lessee making all required payments according to the
lease agreement.
18. ARB 43 recommended capitalization for leases that were, in substance, installment purchases.
19. APB Opinion No. 5 was criticized on the grounds that it excluded many leases that should be
capitalized.
20. SFAS No. 13 identifies four capitalization tests that are now applicable to both lessees and
lessors.
21. All of the tests or conditions identified in SFAS No. 13 must be met before a lease can be
capitalized.
Chapter 16—LEASES
22. The requirements of SFAS No. 13 represent conservatism because a higher interest rate will
cause a higher present value and could therefore result in lease capitalization.
23. Under SFAS No. 13, payments on capital leases are separated into the equivalent of principal and
interest each period.
24. The criteria for capitalizing a real estate lease are identical to those of other leases.
25. Land leases are capitalized only if title passes to the lessee at the end of the lease term and the
lease contract contains a bargain purchase option.
26. It can be argued that all leases over one year should be capitalized.
27. Supplemental disclosures of non-capitalized leases under SFAS No. 13 are greater than under
APB Opinion No. 31.
28. Under current requirements, the weak disclosures of non-capitalized leases create incentives to
structure leases in such a way as to avoid both capitalization and supplemental disclosure.
29. The initial impetus for lease capitalization was caused by concern over lessee balance sheets.
30. A sale and leaseback occurs when the owner of an asset sells it and enters into a lease agreement
to lease the asset back.
31. From a lessee’s point of view, a leveraged lease is very different from the other leases.
32. It is no less true under SFAS No. 13 than it was under ARB 38 that more leases are being
capitalized than should be.
Chapter 16—LEASES
33. A position paper of the G4+1 must be put into effect by each of the member organizations.
34. The G4+1 report on leases would make all leases financing leases.
MULTIPLE CHOICE
1. Which of the following is a characteristic of a true lease?
a. The presence of a provision for the transfer of the title to the lessee
b. The presence of interest as a factor in rental charges
c. Rental charges that are competitive with those charged by other lessors of similar equipment
d. The assumption of the risk of loss by the lessee
2. Which of the following is not a characteristic of a true lease?
a. Government agencies recognized the lessee as the owner of the leased asset.
b. The rentals charged under leasing plans without an option to purchase approximate the
rentals charged under plans with such an option.
c. The lessor retains the right to inspect the equipment during the term of the lease.
d. There is no mention of interest as a factor in rental charges.
3. Which of the following is not one of the criteria that have been suggested for lease
capitalization?
a. Lessee builds up a material equity in the leased property.
b. Lessee pays costs normally incident to ownership.
c. Lease is between related parties.
d. Lease agreement is cancelable.
4. Which of the following is one of the criteria that have been suggested for lease capitalization?
a. The lessee treats lease payments as periodic expenses.
b. The lessor pays costs normally incident to ownership.
c. The lessee treats the lease as a purchase for tax purposes.
d. Leased property is special purpose to the lessor.
Chapter 16—LEASES
5. Which of the following is not a possible treatment of a capital lease?
a. The lessee treats lease payments as periodic expenses.
b. The lessor treats the lease like a sale with vendor financing.
c. The lease is treated by a third party like a loan with income realized through implicit interest
in each lease payment.
d. The lessee treats the lease as a purchase with debt financing.
6. Which of the following applies if a lease is interpreted as unilaterally unperformed by the lessee?
a. The lease contract is fully executed by the lessor when possession of the leased asset is
transferred to the lessee.
b. An asset and liability do not exist for the lessee.
c. The lessor permits use of the asset for one period at a time and only if the rentals are paid by
the lessee.
d. Current lease payments are expensed by the lessee.
7. Which of the following is not a true statement regarding the legal remedies available to lessors in
the event of lessee default?
a. The lease is significantly different from other debt arrangements.
b. The lessee is not liable for future lease payments.
c. The lease is considered unilaterally unperformed.
d. The lessor must first mitigate the loss of rents by selling the asset or leasing it again.
8. A lease must be accounted for as either a rental agreement or a purchase equivalent with debt
financing by:
a. the lessor.
b. the lessee.
c. both the lessor and lessee.
d. none of the above
9. A lease must be accounted for as either a rental agreement, a sale equivalent with debt financing,
or a loan equivalent by:
a. the lessor.
b. the lessee.
c. both the lessor and lessee.
d. none of the above
Chapter 16—LEASES
10. Which of the following lease treatments interpret the lease contract as an operating lease?
a. A rental agreement
b. A loan equivalent
c. A sale equivalent
d. A purchase
11. Which of the following represents the legal approach to capital leases?
a. Limit capital leases to leases that are virtually conditional sales agreements with installment
payments.
b. Capitalize leases where a purchase equivalent has occurred.
c. The lease treatment is the same for lessor and lessee.
d. Capitalize leases that are not true leases.
12. Which of the following represents the material equity approach to capital leases?
a. Limit capital leases to leases that are virtually conditional sales agreements with installment
payments.
b. Capitalize leases where a purchase equivalent has occurred.
c. The lease treatment is the same for lessor and lessee.
d. Capitalize leases that are not true leases.
13. Which of the following represents the “transfer of the benefits and risks of ownership” approach
to capital leases?
a. Limit capital leases to leases that are virtually conditional sales agreements with installment
payments.
b. Capitalize leases where a purchase equivalent has occurred.
c. The lease treatment is the same for lessor and lessee.
d. Capitalize leases that are not true leases.
14. Which of the following is not a true statement regarding ARB 38?
a. It was the first lease accounting standard.
b. It recommended capitalization for leases that were in substance installment purchases.
c. It was most applicable to leases that were de facto conditional sales agreements.
d. Non-cancellability was introduced as a precondition for capitalization.
Chapter 16—LEASES
15. Which of the following is a true statement regarding APB Opinion No. 5?
a. It took a legalistic approach to determining whether a lease was in substance a purchase.
b. The stated objective was to clarify ARB 38, not change it.
c. Cancellability was viewed as mitigating the executory nature of lease contracts.
d. It greatly increased the number of leases that were capitalized.
16. Which of the following statements applies to APB Opinion No. 31?
a. It was criticized on the grounds that it resulted in inconsistent capitalization of financing-type
leases.
b. It required disclosures adequate to permit users to informally capitalize non-capitalized lease
obligations if they so desired.
c. It was an omnibus opinion.
d. It was concerned with lease contracts between related parties.
17. Which of the following does not apply to SFAS No. 13?
a. It changed capitalization criteria.
b. Non-cancellability and material equity were abandoned in favor of broader tests representing
substantive transfers of ownership benefits and risks.
c. It is intended to capitalize fewer leases than previous standards.
d. It provides that the lessee use the lessor’s implicit rate in the lease if it is obtainable and if the
implicit rate is lower than the lessee’s incremental borrowing rate.
18. Which of the following is not one of the capitalization tests now applicable to both lessees and
lessors?
a. Title passes to the lessee at the end of the lease term.
b. The lease contract contains a bargain purchase option.
c. The lease term is at least 75 percent of estimated useful life.
d. Lease agreement is non-cancellable for a long term.
19. How many of the four capitalization tests of SFAS No. 13 must be met for a lease to be
capitalized?
a. One
b. Two
c. Three
d. Four
Chapter 16—LEASES
20. Which of the following is not a supplemental disclosure by the lessee required by SFAS No. 13
for noncancellable operating leases in excess of one year?
a. Future minimum rental payments in aggregate and for each of the succeeding five periods
b. The present value of minimum lease payments
c. Total minimum rentals to be received under non-cancellable subleases
d. Rental expenses with separate totals for minimum rentals, contingent rentals, and sublease
rentals
21. Which of the following was the first accounting standard to address lessor accounting?
a. ARB 38 in 1949
b. APB Opinion No. 7 in 1966
c. APB Opinion No. 3 in 1973
d. SFAS No. 13 in 1976
22. What was the intent of APB Opinion No. 27?
a. To achieve near symmetry in lessee and lessor accounting
b. To expand the use of the material-equity method
c. To broaden the criteria for capitalization
d. To restrict the criteria for capitalization
23. Which of the following applies to SFAS No. 13?
a. It applied the four criteria for a capital lease to both lessees and lessors.
b. It created inconsistencies in financing-type leases.
c. It eliminated asymmetry between lessor and lessee accounting.
d. It requires the lessee to always use the lessor’s implicit interest rate.
24. Which of the following is not a true statement regarding a sale and leaseback?
a. It occurs when the owner of an asset sells the asset and enters into a lease agreement to lease
the asset back.
b. The lessor and lessee both use the standard criteria for classifying such a lease as operating or
capital.
c. The lessor is the original legal owner and the lessee is the new legal owner.
d. SFAS No. 13 allows a gain or loss to be immediately recognized in cases where the original
owner retains the use of a substantially smaller part of the total asset.
25. Which of the following applies to leveraged leases?
a. Leveraged leases are a special type of operating lease involving three parties.
b. The lessor acquires an asset to be leased by borrowing money from a third party.
c. From a lessor’s viewpoint, this type of lease is not any different from other leases.
Chapter 16—LEASES
d. The FASB concluded in SFAS No. 13 that the financing-type lease plus debt transaction
analogy was adequate to report leveraged leases.
26. The G4+1 report on leases would:
a. make all leases operating leases.
b. cause the lessee to show operating leases as assets.
c. move leases from the area of rigid uniformity to finite uniformity.
d. enhance the distinction between operating and financing leases.
ESSAY
1. Respond to the following:
a. Why has so much attention been given to leases in accounting standards?
b. Why is leasing such a popular method of acquiring assets?
c. How have accounting procedures for leases changed since ARB 43?
Chapter 16—LEASES
2. Describe the two types of capital leases that exist from the lessor’s point of view.
3. Respond to the following:
a. What are the current criteria for capitalization identified in SFAS No. 13?
b. How is the minimum lease payment calculated?
4. How does the accounting prescribed in SFAS No. 13 seek to make a capital lease resemble a
purchase by the lessee of an asset with debt financing?
Chapter 16—LEASES
5. Discuss two types of economic consequences of lease accounting.
6. Discuss the effectiveness of SFAS No. 13 in addressing the lease capitalization problem.
7. How does lease accounting under the IASB differ from lease accounting under FAS?