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1.
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Which of the following is an advantage of leasing?
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  A purchase option exists.
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Immediate cash outlay is not required.
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There are usually fewer financing restrictions.
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All of these.
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2.
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The present value of minimum lease payments should be used by the lessee in determining the amount of a lease liability under a lease classified by the lessee as
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Either a Capital Lease or an Operating Lease
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A Capital Lease, but not as an Operating Lease
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Neither a Capital Lease, nor an Operating Lease
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An Operating Lease, but not as a Capital Lease
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3.
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The methods of accounting for a lease by the lessee are
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Operating and capital lease methods.
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Operating, sales, and capital lease methods.
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Operating and leveraged lease methods.
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None of these.
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4.
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Drawbacks to leasing include:
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The lessee may have to retain property no longer needed.
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Leasing allows the lessee under a capital lease, in effect, to depreciate land, which is not allowed if land is purchased.
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There are usually more financing restrictions placed on the lessee by the lessor than are imposed.
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The lessee can make improvements to the leased property without the lessor's permission.
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5.
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Which of the following statements is correct?
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In a direct-financing lease, initial direct costs are added to the net investment in the lease.
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In a sales-type lease, initial direct costs are expensed in the year of incurrence.
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For operating leases, initial direct costs are deferred and allocated over the lease term.
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All of these.
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6.
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Which of the following is a correct statement of one of the capitalization criteria?
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The lease transfers ownership of the property to the lessor.
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The lease contains a purchase option.
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The lease term is equal to or more than 75% of the estimated economic life of the leased property.
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The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property.
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7.
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One of the possible criteria for a capital lease is that the lease term be _________ equal to the estimated useful life of the property.
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8.
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For a capital lease, the amount recorded initially by the lessee as a liability should normally
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Exceed the total of the minimum lease payments.
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Exceed the present value of the minimum lease payments at the beginning of the lease.
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Equal the total of the minimum lease payments.
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Equal the present value of the minimum lease payments at the beginning of the lease.
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9.
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Executory costs include
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Maintenance.
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Property taxes.
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Insurance.
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All of these.
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10.
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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?
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Lessee uses a higher interest rate than that used by lessor.
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Set the lease term at something less than 75% of the estimated useful life of the property.
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Write in a bargain purchase option.
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Use a third party to guarantee the asset's residual value.
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11.
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The amount to be recorded as the cost of an asset under capital lease is equal to the
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Present value of the minimum lease payments.
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Present value of the minimum lease payments or the fair value of the asset, whichever is lower.
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Present value of the minimum lease payments plus the present value of any unguaranteed residual value.
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Carrying value of the asset on the lessor's books.
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12.
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Minimum lease payments may include a
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Penalty for failure to renew.
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Bargain purchase option.
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Guaranteed residual value.
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Any of these.
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13.
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On January 1, 2X10, JCK Co. signed a contract for an 8-year lease of its equipment with a 10-year life. The present value of the 16 equal semiannual payments in advance equaled 85% of the equipment's fair value. The contract had no provision for JCK, the lessor, to give up legal ownership of the equipment. Should JCK recognize rent or interest revenue in 2X12, and should the revenue recognized in 2X12 be the same or smaller than the revenue recognized in 2X11?
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Recognize Rent revenue in 2X12, and it should be the same compared to 2X11.
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Recognize Rent revenue in 2X12, and it should be smaller compared to 2X11.
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Recognize Interest revenue in 2X12, and it should be the same compared to 2X11.
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Recognize Interest revenue in 2X12, and it should be smaller compared to 2X11.
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14.
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A 6-year capital lease entered into on December 31, Year 4, specified equal minimum annual lease payments due on December 31 of each year. The first minimum annual lease payment, paid on December 31, Year 4, consists of which of the following?
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Interest Expense and a Lease Liability
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Interest Expense but not a Lease Liability
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A Lease Liability but not Interest Expense
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Neither Interest Expense nor a Lease Liability
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15.
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In computing the present value of the minimum lease payments, the lessee should
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Use its incremental borrowing rate in all cases.
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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.
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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.
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None of these.
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16.
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The rate that, at the inception of the lease, the lessee would have incurred to borrow the funds necessary to buy the leased asset on a secured loan with repayment terms similar to the payment schedule called for in the lease is called.
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The lessee's indexed borrowing rate
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The lessee's incremental borrowing rate
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The lessee's hypothetical borrowing rate
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The lessee's implicit borrowing rate
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17.
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Moody, Inc. leased equipment from Walker Company under a four-year lease requiring equal annual payments of $20,000, with the first payment due at the end of the year. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. If Moody, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Moody, Inc.) is 8%, what is the amount recorded for the leased asset at the lease inception? (Note the following present values: At 8% for 4 periods, the PV Annuity Due = 3.5771 and the PV Ordinary Annuity = 3.31213. At 10% for 4 periods, the PV Annuity Due = 3.48685 and the PV Ordinary Annuity = 3.16986.)
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$71,542
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$69,737
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$66,243
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$63,397
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18.
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Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $86,038, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. If Pisa, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%, what is the amount recorded for the leased asset at the lease inception? (Note the following present values: At 8% for 4 periods, the PV Annuity Due = 3.5771 and the PV Ordinary Annuity = 3.31213. At 10% for 4 periods, the PV Annuity Due = 3.48685 and the PV Ordinary Annuity = 3.16986.)
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$307,767
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$272,728
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$284,969
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$300,000
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19.
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The Lease Liability account should be disclosed as
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All current liabilities.
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All noncurrent liabilities.
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Current portions in current liabilities and the remainder in noncurrent liabilities.
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Deferred credits.
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20.
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In computing depreciation of a leased asset, the lessee should subtract
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A guaranteed residual value and depreciate over the term of the lease.
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An unguaranteed residual value and depreciate over the term of the lease.
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A guaranteed residual value and depreciate over the life of the asset.
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An unguaranteed residual value and depreciate over the life of the asset.
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21.
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Andy, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $86,038, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Andy, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Andy, Inc.) is 8%. Andy, Inc. uses the straight-line method to depreciate similar assets. What is the amount of depreciation expense recorded by Andy, Inc. in the first year of the asset’s life? (Note the following present values: At 8% for 4 periods, the PV Annuity Due = 3.5771 and the PV Ordinary Annuity = 3.31213. At 10% for 4 periods, the PV Annuity Due = 3.48685 and the PV Ordinary Annuity = 3.16986.)
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$0 because the asset is depreciated by Tower Company.
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$71,242
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$76,942
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$75,000
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22.
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If the residual value of a leased asset is guaranteed by a third party
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It is treated by the lessee as no residual value.
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The third party is also liable for any lease payments not paid by the lessee.
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The net investment to be recovered by the lessor is reduced.
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It is treated as executory costs. As such, they are not included in computing the minimum lease payments.
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23.
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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?
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Transfer of Ownership by End of Lease = NO, Contains Bargain Purchase Option = YES, Collectibility of Lease Payments Assured = YES, and Any Important Uncertainties = NO.
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Transfer of Ownership by End of Lease = YES, Contains Bargain Purchase Option = NO, Collectibility of Lease Payments Assured = NO, and Any Important Uncertainties = NO.
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Transfer of Ownership by End of Lease = YES, Contains Bargain Purchase Option = NO, Collectibility of Lease Payments Assured = NO, and Any Important Uncertainties = YES.
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Transfer of Ownership by End of Lease = NO, Contains Bargain Purchase Option = YES, Collectibility of Lease Payments Assured = YES, and Any Important Uncertainties = YES.
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24.
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The initial direct costs of leasing
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Are generally borne by the lessee.
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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.
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Are expensed in the period of the sale under a sales-type lease.
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All of the above are true with regard to the initial direct costs of leasing.
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25.
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The primary difference between a direct-financing lease and a sales-type lease is the
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Manner in which rental receipts are recorded as rental income.
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Amount of the depreciation recorded each year by the lessor.
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Recognition of the manufacturer's or dealer's profit at the inception of the lease.
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Allocation of initial direct costs by the lessor to periods benefited by the lease arrangements.
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26.
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In a sale-leaseback transaction, the seller-lessee has retained the property. The gain on the sale should be recognized at the time of the sale-leaseback when the lease is classified as a (n)
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Both a Capital Lease and an Operating Lease
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Neither a Capital Lease nor an Operating Lease
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An Operating Lease, but not a Capital Lease
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A Capital Lease, but not an Operating Lease
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27.
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When a company sells property and then leases it back, any gain on the sale should usually be
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Recognized in the current year.
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Recognized as a prior period adjustment.
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Recognized at the end of the lease.
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Deferred and recognized as income over the term of the lease.
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28.
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For a sales-type lease,
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The sales price includes the present value of the unguaranteed residual value.
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The present value of the guaranteed residual value is deducted to determine the cost of goods sold.
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The gross profit will be the same whether the residual value is guaranteed or unguaranteed.
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None of these.
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29.
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Which one of the following statements is true?
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Equipment values, if material, can be commingled with real estate values in leases.
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Minimum lease payments attributable to equipment should not be estimated appropriately and stated separately.
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Equipment values, if material, should be estimated and accounted for separately.
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GAAP does not address the issue of the criteria for the classification of leases being applied separately to the equipment to determine proper accountability.
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30.
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Which of the following statements is true when comparing the accounting for leasing transactions under U.S. GAAP with IFRS?
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IFRS requires that companies provide a year-by-year breakout of future noncancelable lease payments due in years 1 through 5.
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IFRS for leases is more ôrules-basedö than U.S. GAAP and includes many bright-line criteria to determine ownership.
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The IFRS leasing standard is the subject of over 30 interpretations since its issuance in 1982.
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IFRS does not provide detailed guidance for leases of natural resources, sale-leasebacks, and leveraged leases.
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