Test Bank Chapter 21 Accounting for Leases.
CHAPTER 21
ACCOUNTING FOR LEASES
IFRS questions are available at the end of this chapter.
TRUE-FALSe—Conceptual
Answer No. Description
...
Test Bank Chapter 21 Accounting for Leases.
CHAPTER 21
ACCOUNTING FOR LEASES
IFRS questions are available at the end of this chapter.
TRUE-FALSe—Conceptual
Answer No. Description
T 1. Benefits of leasing.
F 2. Accounting for long-term leases.
F 3. Classifying lease containing purchase option.
T 4. Accounting for executory costs.
F 5. Depreciating a capitalized asset.
F 6. Lessee recording of interest expense.
T 7. Benefit of leasing to lessor.
F 8. Distinction between direct-financing and sales-type leases.
F 9. Lessors’ classification of leases.
T 10. Direct-financing leases.
F 11. Accounting for operating lease.
F 12. Computing annual lease payments.
T 13. Guaranteed residual value definition.
F 14. Guaranteed vs. unguaranteed residual value.
T 15. Unguaranteed residual value and minimum lease payments.
F 16. Net investment and guaranteed/unguaranteed residual value.
T 17. Difference between direct-financing and sales-type leases.
F 18. Gross profit in sales-type lease.
T 19. Review of estimated unguaranteed residual value.
T 20. FASB required lease disclosures.
Multiple Choice—Conceptual
Answer No. Description
d 21. Advantages of leasing.
d 22. Advantages of leasing.
b 23. Basic principle of lease accounting.
c 24. Conceptual support for treating all leases as a sale/purchase.
a S25. Essential element of a lease.
b S26. Bargain purchase option and minimum lease payments.
b P27. Cost amount for a capital lease.
a 28. Lease accounting by lessee.
c 29. Knowledge of the capitalization criteria.
d 30. Components of minimum lease payments.
d 31. Identification of executory costs.
c 32. Discount rate used by lessee.
a 33. Depreciation of a leased asset by lessee.
b 34. Effect of a capital lease on lessee's debt.
a P35. Depreciation of a capital lease.
a 36. Identification of lease type for lessor.
d 37. Elements of lease receivable by lessor.
a 38. Recognition of unearned lease income.
c S39. Direct-financing lease receivable.
Multiple Choice—Conceptual (cont.)
Answer No. Description
d S40. Third party guarantee of residual value.
a 41. Lessor’s accounting for residual value.
c 42. Accounting for initial direct costs.
c S43. Difference between direct financing and sales-type lease.
b P44. Amount of revenue in sales-type lease.
c 45. Accounting for a sales-type lease.
d 46. Accounting for initial direct costs.
c 47. Disclosing obligations under capital leases.
c 48. Leasing criteria to avoid asset capitalization.
d *49. Recording asset and interest expense in sale-leaseback lease.
b *50. Accounting for sale-leaseback lease.
d *51. Gain/loss recognition in a sale-leaseback.
P These questions also appear in the Problem-Solving Survival Guide.
S These questions also appear in the Study Guide.
*This topic is dealt with in an Appendix to the chapter.
Multiple Choice—Computational
Answer No. Description
b 52. Operating lease expense for year.
c 53. Calculate interest expense and depreciation expense for lessee.
c 54. Calculate minimum annual lease payment.
d 55. Calculate total annual lease payment.
a 56. Identification of lease type for lessor.
c 57. Identification of lease type for lessee.
c 58. Calculate depreciation expense for lessee.
d 59. Identification of lease type for lessee.
c 60. Calculate leased asset amount.
c 61. Calculate total lease obligation.
a 62. Compute interest expense for year.
b 63. Compute interest expense for year.
d 64. Calculate lease liability amount.
c 65. Compute interest expense and depreciation expense for year.
c 66. Compute interest expense and depreciation expense for year.
d 67. Compute depreciation expense for lease with transfer of title.
a 68. Calculate leased asset amount.
c 69. Compute interest expense for first year.
d 70. Compute principal reduction for second year.
c 71. Calculate depreciation expense for lessee.
b 72. Compute interest expense for first year.
c 73. Calculate leased asset and lease liability amounts.
a 74. Calculate annual lease payments.
b 75. Identification of lease type for lessee.
b 76. Expense recorded by lessee/operating lease.
c 77. Calculate reduction of lease obligation for lessee.
a 78. Identification of lease type for lessor.
c 79. Calculate lease receivable.
Multiple Choice—Computational (cont.)
Answer No. Description
d 80. Revenues and expenses recorded by lessor/operating lease.
a 81. Operating lease expense for year.
d 82. Calculate expense of an operating lease.
a 83. Calculate income from operating lease.
d 84 Journal entry in direct-financing lease.
b 85. Calculate lease payments.
b 86. Journal entry for lessee.
c 87. Journal entry for lessee.
c 88. Calculate loss on guaranteed residual value lease.
c 89. Calculate interest revenue in sales-type lease.
c 90. Determine gross profit and interest revenue.
a 91. Calculate interest expense and depreciation expense for lessee.
b 92. Calculate profit and interest income for lessor/sales-type lease.
c 93. Calculate profit on sales-type lease and interest income.
c 94. Identification of lease type for lessor.
b 95. Determine discount rate implicit in lease payments.
d 96. Lease-related expenses recognized by lessee.
d 97. Determine long-term lease obligation for lessee.
b *98. Gain recognized by lessee in a sale-leaseback.
b *99. Sale-leaseback/operating lease.
Multiple Choice—CPA Adapted
Answer No. Description
c 100. Identification of lease type for lessee.
a 101. Calculate the lease liability of a lessee.
d 102. Calculate the lease liability of a lessee.
a 103. Determine reduction of lease obligation for lessee.
d 104. Calculate interest expense for lessee.
d 105. Calculate depreciation expense for lessee.
c 106. Recognition of interest revenue in a sales-type lease.
a 107. Calculate income realized by lessor/sales-type lease.
d *108. Reporting gain on a sale-leaseback.
d *109. Accounting for the gain on a sale-leaseback.
Exercises
Item Description
E21-110 Capital lease (essay).
E21-111 Capital lease amortization and journal entries.
E21-112 Operating lease.
E21-113 Lease criteria for classification by lessor.
E21-114 Direct-financing lease (essay).
E21-115 Lessor accounting—sales-type lease.
*E21-116 Lessee and lessor accounting (sale-leaseback).
*E21-117 Sale-leaseback.
PROBLEMS
Item Description
P21-118 Lessee accounting—capital lease.
P21-119 Lessee accounting—capital lease.
P21-120 Lessor accounting—direct-financing lease.
CHAPTER LEARNING OBJECTIVES
1. Explain the nature, economic substance, and advantages of lease transactions.
2. Describe the accounting criteria and procedures for capitalizing leases by the lessee.
3. Contrast the operating and capitalization methods of recording leases.
4. Identify the classifications of leases for the lessor.
5. Describe the lessor's accounting for direct-financing leases.
6. Identify special features of lease arrangements that cause unique accounting problems.
7. Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.
8. Describe the lessor's accounting for sales-type leases.
9. List the disclosure requirements for leases.
*10 . Understand and apply lease-accounting concepts to various lease arrangements.
*11. Describe the lessee's accounting for sale-leaseback transactions.
SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Learning Objective 1
1.
TF
2.
TF
21.
MC
22.
MC
23.
MC
24.
MC
S25.
MC
Learning Objective 2
3.
TF
30.
MC
55.
MC
63.
MC
70.
MC
77.
MC
103.
MC
4.
TF
31.
MC
56.
MC
64.
MC
71.
MC
91.
MC
104.
MC
5.
TF
32.
MC
58.
MC
65.
MC
72.
MC
96.
MC
105.
MC
S26.
MC
33.
MC
59.
MC
66.
MC
73.
MC
97.
MC
110.
E
P27.
MC
52.
MC
60.
MC
67.
MC
74.
MC
100.
MC
111.
E
28.
MC
53.
MC
61.
MC
68.
MC
75.
MC
101.
MC
118.
P
29.
MC
54.
MC
62.
MC
69.
MC
76.
MC
102.
MC
119.
P
Learning Objective 3
6.
TF
7.
TF
34.
MC
P35.
MC
81.
MC
82.
MC
112.
E
Learning Objective 4
8.
TF
36.
MC
57.
MC
83.
MC
116.
E
9.
TF
37.
MC
78.
MC
94.
MC
Learning Objective 5
10.
TF
38.
MC
79.
MC
84.
MC
113.
E
120.
P
11.
TF
S39.
MC
80.
MC
95.
MC
114.
E
Learning Objective 6
12.
TF
13.
TF
85.
MC
119.
P
Learning Objective 7
14.
TF
16.
TF
41.
MC
87.
MC
120.
P
15.
TF
S40.
MC
86.
MC
88.
MC
Learning Objective 8
17.
TF
42.
MC
45.
MC
90.
MC
105.
MC
113.
E
18.
TF
S43.
MC
46.
MC
92.
MC
106.
MC
115.
E
19.
TF
P44.
MC
89.
MC
93.
MC
107.
MC
Learning Objective 9
20.
TF
47.
MC
48.
MC
Learning Objective 11*
49.
MC
51.
MC
99.
MC
109.
MC
117.
E
50.
MC
98.
MC
108.
MC
116.
E
Note: TF = True-False
MC = Multiple Choice
E = Exercise
P = Problem
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.
True-False Answers—Conceptual
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
1.
T
6.
F
11.
F
16.
F
2.
F
7.
T
12.
F
17.
T
3.
F
8.
F
13.
T
18.
F
4.
T
9.
F
14.
F
19.
T
5.
F
10.
T
15.
T
20.
T
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 pres
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