Question 1

Operating leases are financial statement examples of off-balance sheet financing.

Accepted Answer

A) True 
 B)False  True

Question 2

Over the life of a lease,the amount charged to expense is

Accepted Answer

A) greater for an operating lease. 
B) greater for a capital lease. 
C) the same for a capital or operating lease. 
D) less for a capital lease. 
A) greater for an operating lease. 
B) greater for a capital lease. 
C) the same for a capital or operating lease. 
D) less for a capital lease. C

Question 3

For tax purposes lessees prefer operating leases.

Accepted Answer

A) True 
 B)False  False

Question 4

The lessor recognizes both interest income and a manufacturer's or dealer's profit during the first year of the lease term when the lease is classified as a sales-type lease.

Accepted Answer

A) True 
 B)False

Question 5

Hatfield Corporation leases a tractor from Star Leasing with a five-year non-cancelable lease on January 1, 2014 under the following terms:
1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year.
2. The fair value of the tractor is $100,000.
3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term.
4. The tractor has a six-year economic life.
5. Hatfield has an excellent credit rating.
6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer.
-With which one of the following entries will Hatfield prepare to record the payment on December 31,2014?

Accepted Answer

A)    
B)    
C)    
D)  $\begin{array}{lll}
\text { DR Interest expense } & 26,379.74 \
\text { CR Cash } & & 26,379.74
\end{array}$ 
A)    
B)    
C)    
D)  $\begin{array}{lll}
\text { DR Interest expense } & 26,379.74 \
\text { CR Cash } & & 26,379.74
\end{array}$

Question 6

Ford signs a non-cancelable 8-year equipment lease with Ray. The lease has an implicit rate of return of 10% to Ray, the lessor. This rate is known to Ford. Ray's incremental borrowing rate is 8.5%. Ford has a 9% incremental borrowing rate. Ray believes that the equipment has a 10-year service life but has reason to suspect that a major overhaul might be required in the fifth to seventh year. Since this is the first year of the equipment's production, Ray warrants equipment for eight full years anyway.
-On Ford's books,this lease is treated as a/an

Accepted Answer

A) operating lease. 
B) capital lease. 
C) direct financing capital lease. 
D) sales-type capital lease. 
A) operating lease. 
B) capital lease. 
C) direct financing capital lease. 
D) sales-type capital lease.

Question 7

Under IFRS

Accepted Answer

A) Disclosure of lessee future minimum lease payments for the periods within one year,within years two through five,and after five years are required. 
B) Lessees can classify some assets held under leases as investment property. 
C) The two additional lessor criteria provided under U.S.GAAP for lease revenue recognition are absent. 
D) All of the choices are correct. 
A) Disclosure of lessee future minimum lease payments for the periods within one year,within years two through five,and after five years are required. 
B) Lessees can classify some assets held under leases as investment property. 
C) The two additional lessor criteria provided under U.S.GAAP for lease revenue recognition are absent. 
D) All of the choices are correct.

Question 8

Which of the following statements pertaining to lease accounting is not correct?

Accepted Answer

A) For a particular lease agreement,the amount of interest expense recorded by the lessee can be different than the amount of interest revenue recorded by the lessor during the same time period. 
B) The current ratio will be decreased over the lease term if a lessor treats a lease as a capital lease rather than an operating lease. 
C) It is very challenging for different firms to treat virtually identical leases dissimilarly due to the fact that the required lease capitalization criteria are difficult to circumvent. 
D) The required disclosures pertaining to operating leases require the lessee to disclose what the impact on the financial statements would have been if the lease would have been treated as a capital lease. 
A) For a particular lease agreement,the amount of interest expense recorded by the lessee can be different than the amount of interest revenue recorded by the lessor during the same time period. 
B) The current ratio will be decreased over the lease term if a lessor treats a lease as a capital lease rather than an operating lease. 
C) It is very challenging for different firms to treat virtually identical leases dissimilarly due to the fact that the required lease capitalization criteria are difficult to circumvent. 
D) The required disclosures pertaining to operating leases require the lessee to disclose what the impact on the financial statements would have been if the lease would have been treated as a capital lease.

Question 9

The annual expense associated with a capital lease decreases over the term of the lease.

Accepted Answer

A) True 
 B)False

Question 10

A lessor mistakenly treated a direct financing lease as an operating lease.How does this mistake impact the following at the end of the first year of the lease term? $\begin{array}{lcc}
&\textbf { Rent/Lease Revenue }&\textbf { Interest Revenue }\\hline
\text { a. } & \text { Overstated } & \text { Understated } \
\text { b. } & \text { Understated } & \text { Understated } \
\text { c. } & \text { Overstated } & \text { Overstated } \
\text { d. } & \text { Understated } & \text { Overstated }
\end{array}$

Accepted Answer

A) Option A 
B) Option B 
C) Option C 
D) Option D 
A) Option A 
B) Option B 
C) Option C 
D) Option D

Question 11

The lessor does not have any asset recorded in its financial statements for a lease classified as a sales-type lease.

Accepted Answer

A) True 
 B)False

Question 12

Morey Corporation leases a tractor from Equity Leasing with a five-year non-cancelable lease on January 1, 2014 under the following terms:
1. Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year.
2. The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor.
3. The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term.
4. The tractor has a six-year economic life.
5. Morey has an excellent credit rating.
6. Equity offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer.
-Which of the following entries will Equity Leasing prepare to record the receipt of the first payment on December 31,2011?

Accepted Answer

A)  DR Cash$\quad$ $26,379.74$
CR Financing income-Leases$\quad$$26,379.74$ 
B)  DR Cash $\quad$$26,379.74$
CR Unearned financing income-Leases$\quad$$26,379.74$ 
C)  DR Cash$\quad$$26,379.74$
CR Leased equipment$\quad$$26,379.74$ 
D)  DR Cash$\quad$$26,379.74$
CR Gross investment in leased asset$\quad$$26,379.74$ 
A)  DR Cash$\quad$ $26,379.74$
CR Financing income-Leases$\quad$$26,379.74$ 
B)  DR Cash $\quad$$26,379.74$
CR Unearned financing income-Leases$\quad$$26,379.74$ 
C)  DR Cash$\quad$$26,379.74$
CR Leased equipment$\quad$$26,379.74$ 
D)  DR Cash$\quad$$26,379.74$
CR Gross investment in leased asset$\quad$$26,379.74$

Question 13

When a lease meets one of the Type I criteria and both of the Type II criteria,the lessor must treat the lease as a capital lease.

Accepted Answer

A) True 
 B)False

Question 14

For a lessor using the operating lease method of recording a lease,the net effect on income is recognized evenly throughout the term of the lease,if the lessor uses straight-line depreciation.

Accepted Answer

A) True 
 B)False

Question 15

Blue Manufacturing produces lathes at an inventory cost of $25,000 each that sell for $32,000. For credit-approved customers, Blue leases the lathes for $8,500 per year for five years. The lathes are guaranteed to last four years and generally have a six-year life.
-What is the manufacturing profit of Blue Manufacturing on a leased lathe?

Accepted Answer

A) $7,000 
B) $8,500 
C) $10,500 
D) $17,500 
A) $7,000 
B) $8,500 
C) $10,500 
D) $17,500

Question 16

Morey Corporation leases a tractor from Equity Leasing with a five-year non-cancelable lease on January 1, 2014 under the following terms:
1. Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year.
2. The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor.
3. The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term.
4. The tractor has a six-year economic life.
5. Morey has an excellent credit rating.
6. Equity offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer.
-Equity records this lease with which one of the following journal entries?

Accepted Answer

A)  DR Gross investment in leased assets$~~~~~~~~$131,898.70
$~~~~~~~~$CR Equipment$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$131,898.70 
B)  DR Gross investment in leased assets$~~~~~~~~$131,898.70
$~~~~~~~~$CR Equipment$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~~$102,607.96
$~~~~~~~~$CR Unearned financing income-
$~~~~~~~~$$~~~~~~$Leases$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$29,290.74 
C)    
D)    
A)  DR Gross investment in leased assets$~~~~~~~~$131,898.70
$~~~~~~~~$CR Equipment$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$131,898.70 
B)  DR Gross investment in leased assets$~~~~~~~~$131,898.70
$~~~~~~~~$CR Equipment$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~~$102,607.96
$~~~~~~~~$CR Unearned financing income-
$~~~~~~~~$$~~~~~~$Leases$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$29,290.74 
C)    
D)

Question 17

A lessee must use the incremental borrowing rate to value a capital lease.

Accepted Answer

A) True 
 B)False

Question 18

A lessee mistakenly treated an operating lease as a capital lease.How does this mistake impact the following at the inception of the lease? $\begin{array}{lcc}
&\textbf{Current Ratio}&\textbf{Asset Turnover Ratio}\\hline
\text { a. } & \text { Overstated } & \text { Understated } \
\text { b. } & \text { Understated } & \text { Understated } \
\text { c. } & \text { Overstated } & \text { Overstated } \
\text { d. } & \text { Understated } & \text { Overstated }
\end{array}$

Accepted Answer

A) Option A 
B) Option B 
C) Option C 
D) Option D 
A) Option A 
B) Option B 
C) Option C 
D) Option D

Question 19

Morey Corporation leases a tractor from Equity Leasing with a five-year non-cancelable lease on January 1, 2014 under the following terms:
1. Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year.
2. The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor.
3. The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term.
4. The tractor has a six-year economic life.
5. Morey has an excellent credit rating.
6. Equity offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer.
-For Equity Leasing,this is treated as a/an

Accepted Answer

A) operating lease. 
B) ordinary capital lease. 
C) direct financing capital lease. 
D) sales-type capital lease. 
A) operating lease. 
B) ordinary capital lease. 
C) direct financing capital lease. 
D) sales-type capital lease.

Question 20

All of the following statements about residual value guarantees are correct except residual value guarantees

Accepted Answer

A) protect lessors against lessees who abuse leased assets. 
B) protect lessees against lessors who abuse leased assets. 
C) protects lessors against technological changes. 
D) protects lessors against marketplace changes. 
A) protect lessors against lessees who abuse leased assets. 
B) protect lessees against lessors who abuse leased assets. 
C) protects lessors against technological changes. 
D) protects lessors against marketplace changes.

Operating leases are financial statement examples of off-balance sheet financing.

Over the life of a lease,the amount charged to expense is

For tax purposes lessees prefer operating leases.

The lessor recognizes both interest income and a manufacturer's or dealer's profit during the first year of the lease term when the lease is classified as a sales-type lease.

Under IFRS

Which of the following statements pertaining to lease accounting is not correct?

The annual expense associated with a capital lease decreases over the term of the lease.

The lessor does not have any asset recorded in its financial statements for a lease classified as a sales-type lease.

When a lease meets one of the Type I criteria and both of the Type II criteria,the lessor must treat the lease as a capital lease.

For a lessor using the operating lease method of recording a lease,the net effect on income is recognized evenly throughout the term of the lease,if the lessor uses straight-line depreciation.

A lessee must use the incremental borrowing rate to value a capital lease.

A lessee mistakenly treated an operating lease as a capital lease.How does this mistake impact the following at the inception of the lease? Current Ratio Asset Turnover Ratio a. Overstated Understated b. Understated Understated c. Overstated Overstated d. Understated Overstated

All of the following statements about residual value guarantees are correct except residual value guarantees

The Economic and Institutional Setting for Financial Reporting

Accrual Accounting and Income Determination

Additional Topics in Income Determination

Structure of the Balance Sheet and Statement of Cash Flows

Essentials of Financial Statement Analysis

The Role of Financial Information in Valuation and Credit Risk Assessment

The Role of Financial Information in Contracting

Receivables

Inventories

Long-Lived Assets

Financial Instruments As Liabilities

Income Tax Reporting

Pensions and Postretirement Benefits

Financial Reporting for Owners Equity

Intercorporate Equity Investments

Statement of Cash Flows

Filters

Exam 12: Financial Reporting for Leases

Operating leases are financial statement examples of off-balance sheet financing.

Over the life of a lease,the amount charged to expense is

For tax purposes lessees prefer operating leases.

The lessor recognizes both interest income and a manufacturer's or dealer's profit during the first year of the lease term when the lease is classified as a sales-type lease.

Under IFRS

Which of the following statements pertaining to lease accounting is not correct?

The annual expense associated with a capital lease decreases over the term of the lease.

The lessor does not have any asset recorded in its financial statements for a lease classified as a sales-type lease.

When a lease meets one of the Type I criteria and both of the Type II criteria,the lessor must treat the lease as a capital lease.

For a lessor using the operating lease method of recording a lease,the net effect on income is recognized evenly throughout the term of the lease,if the lessor uses straight-line depreciation.

A lessee must use the incremental borrowing rate to value a capital lease.

A lessee mistakenly treated an operating lease as a capital lease.How does this mistake impact the following at the inception of the lease? Current Ratio Asset Turnover Ratio a. Overstated Understated b. Understated Understated c. Overstated Overstated d. Understated Overstated

All of the following statements about residual value guarantees are correct except residual value guarantees

The Economic and Institutional Setting for Financial Reporting

Accrual Accounting and Income Determination

Additional Topics in Income Determination

Structure of the Balance Sheet and Statement of Cash Flows

Essentials of Financial Statement Analysis

The Role of Financial Information in Valuation and Credit Risk Assessment

The Role of Financial Information in Contracting

Receivables

Inventories

Long-Lived Assets

Financial Instruments As Liabilities

Income Tax Reporting

Pensions and Postretirement Benefits

Financial Reporting for Owners Equity

Intercorporate Equity Investments

Statement of Cash Flows

Filters