CHAPTER 20: ACCOUNTING FOR LEASES
1. The lessor is the party in the lease agreement who acquires the right to use the leased asset in exchange for making
future lease payments.
a.
True
b.
False
False
1
Easy
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2. A capital lease is in economic substance a purchase by the lessee and a sale or financing arrangement by the lessor.
a.
True
b.
False
True
1
Easy
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3. A lease is classified as a capital lease if the present value of the minimum lease payments is 75% or more of the fair
value of the leased property.
a.
True
b.
False
False
1
Easy
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4. An advantage of an operating lease is that is does not add a liability or an asset to the lessee’s balance sheet, thereby
not affecting certain liquidity and financial leverage ratios.
a.
True
b.
False
True
1
Easy
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5. From the lessee’s point of view, leasing provides a method of making a sale while still maintaining the advantages of
ownership, including security in the asset and tax benefits.
a.
True
b.
False
False
1
Easy
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6. For the lessee, effects of classifying a lease as a capital lease instead of an operating lease typically include decreasing
the current ratio and increasing the debt-to-equity ratio.
a.
True
b.
False
True
1
Easy
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7. If a lease is structured so that the lessee pays a set rental payment each period plus an additional amount based upon
usage or a change in an index, these contingent rental payments should be expensed when the contingency is likely to
be met.
a.
True
b.
False
True
1
Easy
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8. Risks and benefits of ownership transfer to the lessor with a capital lease.
a.
True
b.
False
False
1
Easy
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9. A lessee computes the present value of the minimum lease payments using the lower of either the lessee’s incremental
borrowing rate or the lessor’s implicit interest rate in the lease.
a.
True
b.
False
True
1
Easy
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10. The amount of the lease obligation that is classified as a current liability is the dollar amount of lease payments to be
made during the current year.
a.
True
b.
False
False
1
Easy
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11. A lessee reports noncash investing and financing activity on the statement of cash flows when recording a capital
lease.
a.
True
b.
False
True
1
Easy
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12. The existence and term of renewal or purchase options and escalation clauses are disclosed for capital leases only.
a.
True
b.
False
False
1
Easy
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13. A direct financing capital lease results in a manufacturers or dealers profit or loss and meets one or more of the
capitalization criteria and both of the recognition criteria.
a.
True
b.
False
False
1
Easy
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14. Under operating leases, the lessor usually pays executory costs.
a.
True
b.
False
True
1
Easy
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15. In a direct financing lease, the lessor’s carrying value of the leased asset is less than its fair value.
a.
True
b.
False
False
1
Easy
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16. For the lessor, cash receipts for a direct financing lease are classified as inflows in the financing activities section of
the cash flow statement.
a.
True
b.
False
False
1
Easy
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17. A required disclosure of a direct financing lease is that the cost of property on lease and the amount of the total
accumulated depreciation.
a.
True
b.
False
False
1
Easy
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18. The lease of land cannot be accounted for as an operating lease because land is not subject to depreciation.
a.
True
b.
False
False
1
Easy
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19. If the fair value of land is less than 25% of the total fair value of the leased property at the inception of the lease then
the land is considered to be immaterial and both the lessee and the lessor treat the land and building as a single unit.
a.
True
b.
False
True
1
Easy
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20. If a sales-type lease is renewed at the end of a lease term, the lessor must account for the lease as if it were a direct
financing lease.
a.
True
b.
False
False
1
Easy
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21. A lease that transfers substantially all the risks and benefits of ownership from the lessor to the lessee is referred to as
a.
b.
c.
d.
a
1
Easy
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22. Which of the following combinations of payments would cause a lease to be classified as a capital lease?
a.
minimum periodic rental payments plus executory costs
b.
minimum periodic rental payments plus the payment required for a bargain purchase option
c.
minimum periodic rental payments minus any payment required for a guarantee of the residual value
d.
minimum periodic rental payments minus any payments required for failure to renew or extend the lease
b
1
Moderate
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23. If all of the following are provided for by a lease contract, which one is not included in minimum lease payments for
the lessee?
a.
payments resulting from failure to renew the lease
b.
unguaranteed residual value
c.
bargain purchase price
d.
guaranteed residual value
b
1
Easy
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24. Which of the following criteria would not apply in determining if a lease is a capital lease if the beginning of the lease
term falls within the last 25% of the total estimated economic life of the leased asset?
a.
the lease is non-cancelable
b.
the lease contains a bargain purchase option
c.
the lease transfers ownership of the property to the lessee by the end of the lease term
d.
the lease term is equal to 75% or more of the estimated economic life of the leased property
d
1
Easy
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25. The lessee should classify a lease as a capital lease if
a.
there is a purchase option at the end of the lease term.
b.
the present value of the minimum lease payments is at least 75% of the fair value of the leased property.
c.
the present value of the minimum lease payments is at least 90% of the fair market value of the leased property
to the lessor.
d.
the estimated residual value of the leased property at the termination of the lease is equal to 90% of the lessee’s
guaranteed residual value.
c
1
Easy
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26. Which of the following correctly states a lease capitalization criterion from the point of view of the lessee?
a.
Collectability of the lease payments is reasonably certain.
b.
The present value of the minimum lease payments is equal to 75% or more of the fair value of the leased
property.
c.
The lease contains a bargain purchase option.
d.
The lease term is equal to at least 85% of the estimated economic life of the leased asset.
c
1
Easy
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27. Which of the following facts would require a lessee to classify a lease as a capital lease?
a.
The lease term is 85% of the estimated economic life of the leased property.
b.
The present value of the minimum lease payments is 85% of the fair market value of the leased property to the
lessor, less any investment tax credit accruing to the lessor.
c.
The lease contains a purchase option.
d.
There are no important uncertainties about the amounts of unreimbursable costs.
a
1
Easy
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28. Which of the following correctly states a lessee criterion for classifying a lease as a capital lease?
a.
The lessee guarantees the residual value.
b.
The sum of the lease payments exceeds 90% of the fair value of the asset.
c.
The asset is the property of the lessor at the end of the lease term.
d.
The lease term is equal to 75% or more of the estimated economic life of the leased asset.
d
1
Easy
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29. For which of the following conditions will the lessor classify a capital lease as a sales-type capital lease?
a.
The present value of the minimum lease payments is equal to 90% or more of the fair value.
b.
The fair value of the lease property is greater than its cost.
c.
The lease term is equal to 75% or more of the estimated economic life of the leased property.
d.
The collectability of the minimum lease payments is reasonably assured.
b
1
Easy
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30. Which is an advantage of leasing from a lessee’s viewpoint?
a.
The asset can be acquired without having to make a substantial down payment.
b.
The lease is a way of indirectly making a sale.
c.
“Off-balance-sheet financing” may be avoided.
d.
The risk of obsolescence may be increased.
a
1
Easy
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31. From the lessee’s viewpoint, which of the following is not an advantage of leasing?
a.
If a lease is recorded as a capital lease, the calculated rate of return on the total assets ratio and the current ratio
will be improved.
b.
A lease agreement may reduce the risk of obsolescence for a lessee.
c.
In many cases, an asset may be leased without requiring the lessee to make a substantial down payment.
d.
The lessee may be able to claim larger tax deductions through leasing the asset than if the asset were
purchased.
a
1
Easy
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32. As a generalized statement regarding lease accounting, which statement best compares U.S. GAAP and IFRS?
a.
IFRS for leases are more principles-based than GAAP.
b.
IFRS for leases are more rules-based than GAAP.
c.
IFRS and GAAP are similarly rules-based.
d.
IFRS and GAAP are similarly principles-based.
a
1
Easy
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33. When a lessee makes periodic cash payments for an operating lease, which of the following accounts is increased?
a.
Rent Expense
b.
Leased Equipment
c.
Capital Lease Obligation
d.
Interest Expense
a
1
Easy
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34. The following are indicators in the terms of a lease that cause it to be treated as a capital lease.
(1)
Losses due to cancellation of the lease by the lessee are borne by the lessee.
(2)
Gains and losses due to changes in the fair value of the leased asset are captured by the
lessee.
These indicators are criteria that trigger lease capitalization under
GAAP
IFRS
I.
Yes
Yes
II.
Yes
No
III.
No
Yes
IV.
No
No
a.
I
b.
II
c.
III
d.
IV
c
1
Easy
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35. Which of the following indicators relating to lease capitalization is an example of IFRS criteria being more principles-
based than GAAP with respect to lease accounting?
a.
The title must transfer to the lessee at the end of the lease term.
b.
The present value of the payments must be at least 90% of the fair value of the asset.
c.
The lease term must be a major part of the economic life of the asset.
d.
The lease agreement must contain a bargain purchase option.
c
1
Moderate
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36. What is the effect of treating a lease as a capital lease instead of an operating lease on the lessee’s current ratio and
debt ratio.
a.
Under a capital lease, the current ratio is lower and the debt ratio is lower.
b.
Under a capital lease, the current ratio is lower and the debt ratio is higher.
c.
Under a capital lease, the current ratio is higher and the debt ratio is lower.
d.
Under a capital lease, the current ratio is higher and the debt ratio is higher.
b
1
Moderate
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37. Which is not an advantage of leasing from a lessee’s viewpoint?
a.
The asset can be acquired without having to make a substantial down payment.
b.
The lease is a way of indirectly making a sale.
c.
“Off-balance-sheet financing” may be practiced.
d.
The risk of obsolescence may be reduced.
b
1
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38. From the lessor’s standpoint, which of the following statements regarding leasing is false?
a.
The lease provides a method of indirectly making a sale.
b.
If the residual value of the asset is not guaranteed, the lessor has transferred the risks of residual value
decreases to the lessee.
c.
For sales-type lease agreements, the lessor earns interest in addition to profit from the transfer of the asset.
d.
The accounting procedures used by a lessor for a sales-type lease are similar to the accounting procedures used
for a normal sale of merchandise under a perpetual inventory system.
b
1
Easy
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39. Which of the following is not included in the minimum lease payments?
a.
any guarantee by the lessee of the residual value
b.
any payments on failure to renew or extend the lease
c.
executory costs
d.
minimum periodic rental payments
c
1
Easy
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40. Costs of maintaining leased property such as insurance, maintenance, and property taxes are referred to as
a.
executory costs.
b.
residual value costs.
c.
participatory costs.
d.
incremental costs.
a
1
Moderate
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41. For a lease that contains a bargain purchase option, minimum lease payments include
a.
any guarantee by the lessee of the residual value.
b.
any payments on failure to renew or extend the lease.
c.
executory costs.
d.
minimum periodic rental payments required by the lease over the lease term.
d
1
Moderate
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42. Executory costs
a.
are included in the minimum lease payments by the lessee.
b.
should normally be borne by the party that is, in substance, the owner of the asset.
c.
are the costs incurred by the lessor that are directly associated with negotiating and completing the lease
transaction.
d.
are always paid by the lessee.
b
1
Easy
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43. If a lease is classified as a capital lease because the lease agreement contains a bargain purchase option, the time
period to be used by the lessee to amortize the leased property is
a.
the lease term.
b.
the expected economic life of the property.
c.
the lease term or the expected economic life of the property, whichever is shorter.
d.
the maximum amortization period for intangible assets.
b
1
Moderate
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44. On January 1, 2016, Denise Company signed a lease agreement requiring ten annual payments of $14,000, beginning
December 31, 2016. The agreement was classified as a capital lease. When reviewing Denise’s accounting records,
which of the following journal entries would not be expected?
a.
Leased Equipment 105,210
Capital Lease Obligation 105,210
b.
Interest Expense 7,365
Obligation Under Capital Leases 6,635
Cash 14,000
c.
Depreciation Expense: Leased Equipment 10,521
Accumulated Depreciation:
Leased Equipment 10,521
d.
d
1
Easy
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Rent Expense 14,000
Cash 14,000
Exhibit 20-1
On January 1, 2016, Pearson Company signed a lease agreement requiring six annual payments of $60,000, beginning
December 31, 2016. The lease qualifies as a capital lease. Pearson’s incremental borrowing rate was 9% and the
lessor’s implicit rate, known by Pearson, was 10%. The present value factors of an ordinary annuity of $1 for six
periods for interest rates of 9% and 10% are 4.48592 and 4.35526, respectively.
45. Refer to Exhibit 20-1. What would be the balance of the lease obligation on January 1, 2017, for financial reporting
purposes after the lease payment? (Round answers to the nearest dollar.)
a.
$0
b.
$166,779
c.
$227,448
d.
$233,379
d
1
Moderate
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46. Refer to Exhibit 20-1. What would be the interest expense for 2016 (round answers to the nearest dollar)?
a.
$21,003
b.
$22,746
c.
$24,224
d.
$26,133
c
1
Moderate
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47. Refer to Exhibit 20-1. What would be the balance of the lease obligation for financial reporting purposes on December
31, 2017, after the lease payment (round answers to the nearest dollar)?
a.
$38,996
b.
$167,979
c.
$194,383
d.
$233,379
c
1
Moderate
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48. On January 1, 2016, Watson Company signed a four-year lease requiring annual payments of $45,000, with the first
payment due on January 1, 2016. Watson’s incremental borrowing rate was 7%. Actuarial information for 7% follows:
3 Periods
4 Periods
5 Periods
Present value of an annuity due of 1 @ 7%
2.80802
3.62432
4.38721
Present value of ordinary annuity of 1 @ 7%
2.62432
3.38721
4.10020
Assuming the lease qualifies as a capital lease, what amount should be recorded as leased equipment under capital
leases on January 1, 2016 (rounded to the nearest dollar)?
a.
$197,424
b.
$163,094
c.
$152,424
d.
$184,509
b
1
Moderate
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49. On January 1, 2016, Renee Corp., a lessee, signed a five-year capital lease for new equipment. The lease requires
annual payments of $8,000. The first payment is due on December 31, 2016. Renee guaranteed a residual value of
$2,000. On December 31, 2020, Renee returned the asset to the lessor, and the asset was appraised at a value of
$1,500. Renee should record which of the following on December 31, 2020?
a.
a $1,500 credit to leased equipment
b.
a $500 debit to loss on disposal of leased equipment
c.
a $500 debit to cash
d.
a $1,500 credit to cash
b
1
Easy
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50. If a lessee classifies a lease as a capital lease and uses the straight-line method of depreciation, what is the amount to
be amortized over the lease term?
a.
the original amount capitalized less the present value of the guaranteed residual value (if applicable)
b.
the original amount capitalized less the unguaranteed residual value
c.
the original amount capitalized less the guaranteed residual value (if applicable)
d.
fair value of the leased property
c
1
Moderate
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51. On January 1, 2016, Kathy Corp. leased equipment by signing a five-year lease that required five payments of $60,000
due on December 31 of each year. Kathy has a 9% cost of capital and capitalized the lease on January 1, 2016, in the
amount of $233,379. As of December 31, 2016, what amount is reported as the current portion of the lease obligation?
a.
$60,000
b.
$46,331
c.
$42,506
d.
$13,669
c
1
Challenging
ACCT.WHAL.16.20.4 – LO: 20.4
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing
52. On January 1, 2016, Mark Company leased equipment by signing a five-year lease that required five payments of
$85,000 due on December 31 of each year. The equipment remains the property of the lessor at the end of the lease,
and Mark does not guarantee any residual value. Using a rate of 11%, Mark capitalized the lease on January 1, 2016,
in the amount of $314,152. What is the amount of the lease obligation on December 31, 2017?
a.
$263,709
b.
$207,717
c.
$279,595
d.
$225,350
b
1
Moderate
ACCT.WHAL.16.20.3 – LO: 20.3
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing
53. On January 1, 2016, Reynolda Co. leased equipment by signing a five-year lease that required five payments of
$30,000 due on January 1 of each year with the first payment due January 1, 2016. The equipment remains the
property of the lessor at the end of the lease and Reynolda does not guarantee any residual value. Using a 10% cost of
capital, Reynolda capitalized the lease on January 1, 2016, in the amount of $125,096. What is the amount of current
portion of the lease obligation Reynolda should report on the December 31, 2017, balance sheet?
a.
$7,461
b.
$20,490
c.
$22,539
d.
$30,000
c
1
Moderate
ACCT.WHAL.16.20.3 – LO: 20.3
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing