Question 1

Treating a lease as an operating lease rather than a capital lease results in an increase in the asset turnover ratio.

Accepted Answer

A) True 
 B)False

Question 2

If a lease contains a residual value guarantee,the lessee must

Accepted Answer

A) add the guaranteed amount to the present value of the minimum lease payments. 
B) add the present value of the guaranteed amount to the present value of the minimum lease payments. 
C) include the guaranteed amount in the minimum lease payments only if the lessee intends to keep the asset at the end of the lease. 
D) ignore the guaranteed amount if the lessee intends to keep the asset at the end of the lease. 
A) add the guaranteed amount to the present value of the minimum lease payments. 
B) add the present value of the guaranteed amount to the present value of the minimum lease payments. 
C) include the guaranteed amount in the minimum lease payments only if the lessee intends to keep the asset at the end of the lease. 
D) ignore the guaranteed amount if the lessee intends to keep the asset at the end of the lease.

Question 3

Compared to a firm with a capital lease,operating leases help the lessee firm earn

Accepted Answer

A) higher asset turnover ratio. 
B) lower return on assets. 
C) higher debt-to-equity ratio. 
D) lower NOPAT. 
A) higher asset turnover ratio. 
B) lower return on assets. 
C) higher debt-to-equity ratio. 
D) lower NOPAT.

Question 4

When accounting for a capital lease,depreciation expense is equal to the

Accepted Answer

A) lease payments. 
B) principal portion of the lease payments. 
C) normal depreciation computed on the depreciable base of the asset. 
D) straight-line depreciation only on the full amount of the leased asset. 
A) lease payments. 
B) principal portion of the lease payments. 
C) normal depreciation computed on the depreciable base of the asset. 
D) straight-line depreciation only on the full amount of the leased asset.

Question 5

For a lessee,the current ratio deteriorates with a capitalized lease.

Accepted Answer

A) True 
 B)False

Question 6

The lessor's Gross investment in leased asset balance is the same at the end of the lease term whether the residual value is guaranteed or unguaranteed.

Accepted Answer

A) True 
 B)False

Question 7

Executory costs of a lease are treated by the lessee as

Accepted Answer

A) capitalized costs of the lease. 
B) additional interest expense. 
C) operating expenses. 
D) deferred revenue. 
A) capitalized costs of the lease. 
B) additional interest expense. 
C) operating expenses. 
D) deferred revenue.

Question 8

If a lessee mistakenly treats a capital lease as an operating lease,both assets and liabilities would be understated at the inception of the lease.

Accepted Answer

A) True 
 B)False

Question 9

On January 1,2014,Lessee Corporation entered into a ten-year lease.The lease terms required annual year-end payments of $160,000.The lease agreement does not contain either a bargain purchase option or a transfer of title.The fair value of the equipment at the inception of the lease was $1,100,000;estimated life of the leased assets was fourteen years.Lessee Corporation's incremental borrowing rate was 10%;the implicit rate of interest,known to the lessee,was 12%.Applicable time value of money values are as follows: $\begin{array}{ll}
\text { Ten-year, } 10 \% \text { ordinary annuity } & 6.144 \
\text { Ten-year, } 12 \% \text { ordinary annuity } & 5.650 \
\text { Ten-year, } 10 \% \text { annuity due } & 6.759 \
\text { Ten-year, } 12 \% \text { annuity due } & 6.328
\end{array}$
Lessee Corporation should initially capitalize the lease at what amount?

Accepted Answer

A) $0,the lease should not be capitalized 
B) $983,040 
C) $1,081,440 
D) $904,000 
A) $0,the lease should not be capitalized 
B) $983,040 
C) $1,081,440 
D) $904,000

Question 10

Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor's implicit lease rate, known to the lessee, is 10%.
Present value interest factors are:
$$\begin{array} { l c c } 
& \underline { \mathbf { 1 0 \% } } & \underline { \mathbf { 1 2 \% } } \
\text { PVIF \$1 } 10 \text { periods } & 0.38554 & 0.32197 \
\text { PVIF Annuity } 10 \text { periods } & 6.14457 & 5.65022
\end{array}$$
-At the end of Year 1,Pepper will make a payment of $30,000.Which one of the following entries will properly record this payment? (Round all calculations to the nearest whole dollar amount.)

Accepted Answer

A)  DR Obligation under capital lease$~~~~~~~~$30,000
$~~~~~~~~$CR Cash$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$30,000 
B)  $\begin{array} { l l r r } 
\text { DR } & \text { Obligation under capital lease } & 14,253 & \
\text { DR } & \text { Interest expense } & 15,747 & \
& \text { CR Cash } & & 30,000
\end{array}$ 
C)  $\begin{array} { l l r r } 
\text { DR } & \text { Obligationunder capital lease } & 9,253 & \
\text { DR } & \text { Maintenance expense } & 5,000 & \
\text { DR } & \text { Interest expense } & 15,747 & \
& \text { CR Cash } & & 30,000
\end{array}$ 
D)  $\begin{array} { l l r l } 
\text { DR } & \text { Obligation under capital lease } & 25,000 & \
\text { DR } & \text { Maintenance expense } & 5,000 & \
& \text { CR Cash } & & 30,000
\end{array}$ 
A)  DR Obligation under capital lease$~~~~~~~~$30,000
$~~~~~~~~$CR Cash$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$30,000 
B)  $\begin{array} { l l r r } 
\text { DR } & \text { Obligation under capital lease } & 14,253 & \
\text { DR } & \text { Interest expense } & 15,747 & \
& \text { CR Cash } & & 30,000
\end{array}$ 
C)  $\begin{array} { l l r r } 
\text { DR } & \text { Obligationunder capital lease } & 9,253 & \
\text { DR } & \text { Maintenance expense } & 5,000 & \
\text { DR } & \text { Interest expense } & 15,747 & \
& \text { CR Cash } & & 30,000
\end{array}$ 
D)  $\begin{array} { l l r l } 
\text { DR } & \text { Obligation under capital lease } & 25,000 & \
\text { DR } & \text { Maintenance expense } & 5,000 & \
& \text { CR Cash } & & 30,000
\end{array}$

Question 11

A lessor mistakenly treated a direct financing lease as an operating lease (the lessor uses straight-line depreciation).How does this mistake impact the following at the end of the first year of the lease term? $\begin{array}{lcc}
&\textbf { Net Income }&\textbf { Interest Revenue }\\hline
\text { a. } & \text { Overstated } & \text { Understated } \
\text { b. } & \text { Understated } & \text { Understated } \
\text { c. } & \text { Overstated } & \text { Overstated } \
\text { d. } & \text { Understated } & \text { Overstated }
\end{array}$

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 12

Residual value guarantees protect lessors against lessees who abuse leased assets.

Accepted Answer

A) True 
 B)False

Question 13

When accounting for an operating lease,depreciation expense is recorded by the lessee.

Accepted Answer

A) True 
 B)False

Question 14

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 Ray's books,this lease 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 15

Managers in lessee companies prefer that leases be treated as capital leases.

Accepted Answer

A) True 
 B)False

Question 16

GAAP establishes specific criteria for the treatment of leases.Which of the following does not accurately describe the criteria applicable to a lessee?

Accepted Answer

A) The lease agreement contains a bargain purchase option. 
B) The lease term is equal to or exceeds 75% of the leased asset's useful life. 
C) The lease agreement transfers title of the leased asset to the lessee at the end of the lease term. 
D) The present value of the minimum lease payments is equal to or greater than 75% of the leased asset's fair value. 
A) The lease agreement contains a bargain purchase option. 
B) The lease term is equal to or exceeds 75% of the leased asset's useful life. 
C) The lease agreement transfers title of the leased asset to the lessee at the end of the lease term. 
D) The present value of the minimum lease payments is equal to or greater than 75% of the leased asset's fair value.

Question 17

GAAP establishes specific criteria for the treatment of leases.One of the criteria states that the lessee must capitalize a lease if the lease agreement contains a bargain purchase option.

Accepted Answer

A) True 
 B)False

Question 18

If a company sells an asset for a profit of $175,000 and immediately leases it back with a capital lease,the gain is recognized

Accepted Answer

A) immediately as an ordinary gain. 
B) immediately as an extraordinary gain. 
C) over the life of the lease in proportion to the rental payment. 
D) over the life of the lease using the same rate and life used to amortize the leased asset. 
A) immediately as an ordinary gain. 
B) immediately as an extraordinary gain. 
C) over the life of the lease in proportion to the rental payment. 
D) over the life of the lease using the same rate and life used to amortize the leased asset.

Question 19

Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor's implicit lease rate, known to the lessee, is 10%.
Present value interest factors are:
$$\begin{array} { l c c } 
& \underline { \mathbf { 1 0 \% } } & \underline { \mathbf { 1 2 \% } } \
\text { PVIF \$1 } 10 \text { periods } & 0.38554 & 0.32197 \
\text { PVIF Annuity } 10 \text { periods } & 6.14457 & 5.65022
\end{array}$$
-Upon acquisition,the leased equipment will be valued on Pepper's balance sheet at (Round all calculations to the nearest whole dollar amount.)

Accepted Answer

A) $144,475. 
B) $157,469. 
C) $175,000. 
D) $250,000. 
A) $144,475. 
B) $157,469. 
C) $175,000. 
D) $250,000.

Question 20

To remain in accordance with GAAP,operating leases require note disclosure of the

Accepted Answer

A) amount of annual rental payments. 
B) discounted present value of future lease payments. 
C) undiscounted present value of future lease payments. 
D) future cash outflows arising from operating leases. 
A) amount of annual rental payments. 
B) discounted present value of future lease payments. 
C) undiscounted present value of future lease payments. 
D) future cash outflows arising from operating leases.

Treating a lease as an operating lease rather than a capital lease results in an increase in the asset turnover ratio.

If a lease contains a residual value guarantee,the lessee must

Compared to a firm with a capital lease,operating leases help the lessee firm earn

When accounting for a capital lease,depreciation expense is equal to the

For a lessee,the current ratio deteriorates with a capitalized lease.

The lessor's Gross investment in leased asset balance is the same at the end of the lease term whether the residual value is guaranteed or unguaranteed.

Executory costs of a lease are treated by the lessee as

If a lessee mistakenly treats a capital lease as an operating lease,both assets and liabilities would be understated at the inception of the lease.

Residual value guarantees protect lessors against lessees who abuse leased assets.

When accounting for an operating lease,depreciation expense is recorded by the lessee.

Managers in lessee companies prefer that leases be treated as capital leases.

GAAP establishes specific criteria for the treatment of leases.Which of the following does not accurately describe the criteria applicable to a lessee?

GAAP establishes specific criteria for the treatment of leases.One of the criteria states that the lessee must capitalize a lease if the lease agreement contains a bargain purchase option.

If a company sells an asset for a profit of $175,000 and immediately leases it back with a capital lease,the gain is recognized

To remain in accordance with GAAP,operating leases require note disclosure of the

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

Treating a lease as an operating lease rather than a capital lease results in an increase in the asset turnover ratio.

If a lease contains a residual value guarantee,the lessee must

Compared to a firm with a capital lease,operating leases help the lessee firm earn

When accounting for a capital lease,depreciation expense is equal to the

For a lessee,the current ratio deteriorates with a capitalized lease.

The lessor's Gross investment in leased asset balance is the same at the end of the lease term whether the residual value is guaranteed or unguaranteed.

Executory costs of a lease are treated by the lessee as

If a lessee mistakenly treats a capital lease as an operating lease,both assets and liabilities would be understated at the inception of the lease.

Residual value guarantees protect lessors against lessees who abuse leased assets.

When accounting for an operating lease,depreciation expense is recorded by the lessee.

Managers in lessee companies prefer that leases be treated as capital leases.

GAAP establishes specific criteria for the treatment of leases.Which of the following does not accurately describe the criteria applicable to a lessee?

GAAP establishes specific criteria for the treatment of leases.One of the criteria states that the lessee must capitalize a lease if the lease agreement contains a bargain purchase option.

If a company sells an asset for a profit of $175,000 and immediately leases it back with a capital lease,the gain is recognized

To remain in accordance with GAAP,operating leases require note disclosure of the

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