Explore key aspects of lease accounting with this focused quiz. Covering reasons for leasing, advantages, current practices, theoretical justifications, and essential elements, this quiz enhances understanding of complex lease transactions and their financial reporting implications.
A. Off-balance-sheet financing
B. Less costly financing
C. 100% financing at fixed rates
D. All of these
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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.
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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.
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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.
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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.
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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.
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A. operating and capital lease methods.
B. operating, sales, and capital lease methods.
C. operating and leveraged lease methods.
D. none of these.
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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.
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A. penalty for failure to renew.
B. bargain purchase option.
C. guaranteed residual value.
D. any of these.
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A. maintenance.
B. property taxes.
C. insurance.
D. all of these
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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.
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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.
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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.
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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.
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A. Guaranteed residual value
B. Unguaranteed residual value
C. A bargain purchase option
D. All would be included
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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.
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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 market 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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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A. all current liabilities.
B. all noncurrent liabilities.
C. current portions in current liabilities and the remainder in noncurrent liabilities.
D. deferred credits.
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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.
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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.
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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.
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