Question 1

A lease is legally a/an ___________ contract.

Accepted Answer

A) mutually performed 
B) executed 
C) executory 
D) unilateral 
A) mutually performed 
B) executed 
C) executory 
D) unilateral

Question 2

When a company has an operating lease for its primary premises it would record a lease asset on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 3

All of the following are true of constructive capitalization except

Accepted Answer

A) It's a method for making balance sheet data historically correct. 
B) It treats all leases as if they were capital leases. 
C) The liability is the discounted present value of the stream of minimum operating lease payments. 
D) The method makes use of a discount rate that is the weighted average rate implicit in all leases,or the weighted average rate on interest-bearing long-term debt. 
A) It's a method for making balance sheet data historically correct. 
B) It treats all leases as if they were capital leases. 
C) The liability is the discounted present value of the stream of minimum operating lease payments. 
D) The method makes use of a discount rate that is the weighted average rate implicit in all leases,or the weighted average rate on interest-bearing long-term debt.

Question 4

On January 1,2015,Cole Corporation entered into a ten-year lease agreement.The following summarizes the agreement:
• Payments of $30,000 are due at the beginning of each year;the first payment was made on January 1,2015.
• The leased asset has an estimated useful life of 15 years.
• Title to the leased asset is transferred to Cole at the end of the lease term.
• The implicit interest rate known by Cole is 10%.
• Cole's incremental borrowing rate is 12%.
• Cole uses the straight-line depreciation method.
• The asset's estimated salvage value is $50,000 after 10 years and is $15,000 after 15 years.
Required:
1.Determine the interest expense associated with the lease for the year ended December 31,2015.
2.Determine the depreciation expense for the year ended December 31,2015.

Accepted Answer

The present value of the lease payments

Question 5

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

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 6

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.
-With which of the following entries will Equity Leasing prepare to record the revenue earned on December 31,2014?

Accepted Answer

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

Question 7

A lessee must use which one of the following discount rates to value a capital lease?

Accepted Answer

A) Prime rate 
B) Implicit lease rate 
C) Lessee's incremental borrowing rate 
D) Lower of implicit lease rate or lessee's incremental borrowing rate 
A) Prime rate 
B) Implicit lease rate 
C) Lessee's incremental borrowing rate 
D) Lower of implicit lease rate or lessee's incremental borrowing rate

Question 8

To adjust for distortions that arise from off-balance sheet leases when comparing among firms,analysts rely on

Accepted Answer

A) the balance sheet. 
B) the income statement. 
C) the statement of stockholders' equity. 
D) required note disclosures. 
A) the balance sheet. 
B) the income statement. 
C) the statement of stockholders' equity. 
D) required note disclosures.

Question 9

With a leveraged lease,the lessor must treat the lease as a direct financing lease.

Accepted Answer

A) True 
 B)False

Question 10

If a corporation signs a ten-year lease for a building and the present value of the lease payments is $250,000,the lease is a capital lease if the

Accepted Answer

A) fair value of the building is $1,000,000. 
B) remaining useful life of the building is 20 years. 
C) lessor can purchase the building for $5,000 at the end of the lease when the fair value is estimated to be $25,000. 
D) building reverts back to the lessor at the end of the lease. 
A) fair value of the building is $1,000,000. 
B) remaining useful life of the building is 20 years. 
C) lessor can purchase the building for $5,000 at the end of the lease when the fair value is estimated to be $25,000. 
D) building reverts back to the lessor at the end of the lease.

Question 11

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:
$$\begin{array} { l c c } 
& \underline { \mathbf { 1 0 \% } } & \underline { \mathbf { 1 2 \% } } \
\text { PVIF \$1 } 10 \text { periods } & 0.38554 & 0.32197 \
\text { PVIF Annuity } 10 \text { periods } & 6.14457 & 5.65022
\end{array}$$
-If the equipment is worth $7,500 at the end of the lease,Pepper will make which one of the following journal entries?

Accepted Answer

A)  DR Obligation under capital lease$~~~~~~~~$$~~~~~~~~$7,500
$~~~~~~~~$CR Leased equipment-Capital lease$~~~~~~~~$$~~~~~~~~$7,500 
B)  DR Obligation under capital lease$~~~~~~~~$$~~~~~~~~$12,500
$~~~~~~~~$CR Leased equipment-Capital lease$~~~~~~~~~~$$~~~~~~~~$10,000
$~~~~~~~~$CR Cash$~~~~~~~~$$~~~~~~~~$$~~~~~~~~~~~~$$~~~~~~~~$$~~~~~~~~~~$$~~~~~~~~~$2,500 
C)  DR Obligation under capital lease$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$10,000
DR Loss on residual value guarantee$~~~~~~~~$$~~~~~~~~~~~~~~$2,500
$~~~~~~~~$CR Leased equipment - Capital lease$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$10,000
$~~~~~~~~$CR Cash$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~$$~~~~~~~~$2,500 
D) No entry requireD. 
A)  DR Obligation under capital lease$~~~~~~~~$$~~~~~~~~$7,500
$~~~~~~~~$CR Leased equipment-Capital lease$~~~~~~~~$$~~~~~~~~$7,500 
B)  DR Obligation under capital lease$~~~~~~~~$$~~~~~~~~$12,500
$~~~~~~~~$CR Leased equipment-Capital lease$~~~~~~~~~~$$~~~~~~~~$10,000
$~~~~~~~~$CR Cash$~~~~~~~~$$~~~~~~~~$$~~~~~~~~~~~~$$~~~~~~~~$$~~~~~~~~~~$$~~~~~~~~~$2,500 
C)  DR Obligation under capital lease$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$10,000
DR Loss on residual value guarantee$~~~~~~~~$$~~~~~~~~~~~~~~$2,500
$~~~~~~~~$CR Leased equipment - Capital lease$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$10,000
$~~~~~~~~$CR Cash$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~$$~~~~~~~~$2,500 
D) No entry requireD.

Question 12

Constructive capitalization occurs when analysts treat capital leases as operating leases and approximate what balance sheet numbers would have been had the leases not been capitalized.

Accepted Answer

A) True 
 B)False

Question 13

Describe three capital lease disclosures that are required of the lessee according to current GAAP.

Accepted Answer

Restrictions imposed by the lease such a

Question 14

The difference in the lessor's income recognition over the life of the lease,between an operating lease and a capital lease is

Accepted Answer

A) zero. 
B) the amount of the interest revenue. 
C) the financing revenue minus the depreciation. 
D) the depreciation expense. 
A) zero. 
B) the amount of the interest revenue. 
C) the financing revenue minus the depreciation. 
D) the depreciation expense.

Question 15

When a lessee has a capital lease,the amount shown for the asset and the amount shown for the related liability are equal

Accepted Answer

A) only at the lease inception. 
B) throughout the life of the lease. 
C) only at the termination of the lease. 
D) throughout the life of the lease,but only when there is an unguaranteed residual value. 
A) only at the lease inception. 
B) throughout the life of the lease. 
C) only at the termination of the lease. 
D) throughout the life of the lease,but only when there is an unguaranteed residual value.

Question 16

GAAP defines lessors' treatment of leases according to Type I and Type II characteristics.Type II characteristics are linked to

Accepted Answer

A) the critical event criteria for expense recognition. 
B) the critical event criteria for revenue recognition. 
C) measurement of collectibility for revenue recognition. 
D) measurement of historical cost. 
A) the critical event criteria for expense recognition. 
B) the critical event criteria for revenue recognition. 
C) measurement of collectibility for revenue recognition. 
D) measurement of historical cost.

Question 17

Under IFRS,which of the following is an indicator of a situation (individually or in combination)that could lead to a lease being classified as a finance lease?

Accepted Answer

A) If the lessor can cancel the lease,the lessee's losses associated with the cancellation are borne by the lessor. 
B) The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent. 
C) Gains or losses from the fluctuation in the fair value of the residual accrue to the lessor. 
D) All of the choices are indicators. 
A) If the lessor can cancel the lease,the lessee's losses associated with the cancellation are borne by the lessor. 
B) The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent. 
C) Gains or losses from the fluctuation in the fair value of the residual accrue to the lessor. 
D) All of the choices are indicators.

Question 18

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:
$$\begin{array} { l c c } 
& \underline { \mathbf { 1 0 \% } } & \underline { \mathbf { 1 2 \% } } \
\text { PVIF \$1 } 10 \text { periods } & 0.38554 & 0.32197 \
\text { PVIF Annuity } 10 \text { periods } & 6.14457 & 5.65022
\end{array}$$
-The lease liability 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 19

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.
-Assuming that the lease is a capital lease for Ray,which one of the following interest rates will Ray use to record this lease?

Accepted Answer

A) Use 8.5% because it is the lessor's incremental borrowing rate. 
B) Use 9.0% because it is the lessee's incremental borrowing rate. 
C) Use 10.0% because it is the implicit lease rate of return to the lessor. 
D) Use 8.5% because it is the lesser of the implicit rate and Ray's incremental borrowing rate. 
A) Use 8.5% because it is the lessor's incremental borrowing rate. 
B) Use 9.0% because it is the lessee's incremental borrowing rate. 
C) Use 10.0% because it is the implicit lease rate of return to the lessor. 
D) Use 8.5% because it is the lesser of the implicit rate and Ray's incremental borrowing rate.

Question 20

In May 2013,the FASB and the IASB issued a jointly developed leasing exposure draft which

Accepted Answer

A) Takes a property rights approach and would require lessees to record a "right-of-use" asset and the associated liability. 
B) Takes a performance obligation approach for lessees and removes the asset from the balance sheet rather than establishing a lease liability. 
C) Takes a derecognition approach for lessees and establishes a lease asset and a lease liability for the present value of the expected rental payments. 
D) All of the choices are correct. 
A) Takes a property rights approach and would require lessees to record a "right-of-use" asset and the associated liability. 
B) Takes a performance obligation approach for lessees and removes the asset from the balance sheet rather than establishing a lease liability. 
C) Takes a derecognition approach for lessees and establishes a lease asset and a lease liability for the present value of the expected rental payments. 
D) All of the choices are correct.

A lease is legally a/an ___________ contract.

When a company has an operating lease for its primary premises it would record a lease asset on the balance sheet.

All of the following are true of constructive capitalization except

A lessee mistakenly treated an operating lease as a capital lease.How does this mistake impact the following at the inception of the lease? Total Assets Total Liabilities a. Understated Overstated b. Understated Understated c. Overstated Overstated d. Overstated Understated

A lessee must use which one of the following discount rates to value a capital lease?

To adjust for distortions that arise from off-balance sheet leases when comparing among firms,analysts rely on

With a leveraged lease,the lessor must treat the lease as a direct financing lease.

If a corporation signs a ten-year lease for a building and the present value of the lease payments is $250,000,the lease is a capital lease if the

Constructive capitalization occurs when analysts treat capital leases as operating leases and approximate what balance sheet numbers would have been had the leases not been capitalized.

Describe three capital lease disclosures that are required of the lessee according to current GAAP.

The difference in the lessor's income recognition over the life of the lease,between an operating lease and a capital lease is

When a lessee has a capital lease,the amount shown for the asset and the amount shown for the related liability are equal

GAAP defines lessors' treatment of leases according to Type I and Type II characteristics.Type II characteristics are linked to

Under IFRS,which of the following is an indicator of a situation (individually or in combination)that could lead to a lease being classified as a finance lease?

In May 2013,the FASB and the IASB issued a jointly developed leasing exposure draft which

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

A lease is legally a/an ___________ contract.

When a company has an operating lease for its primary premises it would record a lease asset on the balance sheet.

All of the following are true of constructive capitalization except

A lessee mistakenly treated an operating lease as a capital lease.How does this mistake impact the following at the inception of the lease? Total Assets Total Liabilities a. Understated Overstated b. Understated Understated c. Overstated Overstated d. Overstated Understated

A lessee must use which one of the following discount rates to value a capital lease?

To adjust for distortions that arise from off-balance sheet leases when comparing among firms,analysts rely on

With a leveraged lease,the lessor must treat the lease as a direct financing lease.

If a corporation signs a ten-year lease for a building and the present value of the lease payments is $250,000,the lease is a capital lease if the

Constructive capitalization occurs when analysts treat capital leases as operating leases and approximate what balance sheet numbers would have been had the leases not been capitalized.

Describe three capital lease disclosures that are required of the lessee according to current GAAP.

The difference in the lessor's income recognition over the life of the lease,between an operating lease and a capital lease is

When a lessee has a capital lease,the amount shown for the asset and the amount shown for the related liability are equal

GAAP defines lessors' treatment of leases according to Type I and Type II characteristics.Type II characteristics are linked to

Under IFRS,which of the following is an indicator of a situation (individually or in combination)that could lead to a lease being classified as a finance lease?

In May 2013,the FASB and the IASB issued a jointly developed leasing exposure draft which

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