When a company sells property and then leases it back, any gain on the sale should usually be

When a company sells property and then leases it back, any gain on the sale should usually be

a. recognized in the current year.
b. recognized as a prior period adjustment.
c. recognized at the end of the lease.
d. deferred and recognized as income over the term of the lease.

Answer: D

In a sale-leaseback transaction where none of the four leasing criteria are satisfied, which of the following is false?

In a sale-leaseback transaction where none of the four leasing criteria are satisfied, which of the following is false?

a. The seller-lessee removes the asset from its books.
b. The purchaser-lessor records a gain.
c. The seller-lessee records the lease as an operating lease.
d. All of the above are false statements.

Answer: B

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?

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?

a. Lessee uses a higher interest rate than that used by lessor.
b. Set the lease term at something less than 75% of the estimated useful life of the property.
c. Write in a bargain purchase option.
d. Use a third party to guarantee the asset's residual value.

Answer: C

The Lease Liability account should be disclosed as

The Lease Liability account should be disclosed as

a. all current liabilities.
b. all noncurrent liabilities.
c. current portions in current liabilities and the remainder in noncurrent liabilities.
d. deferred credits.

Answer: C

Which of the following statements is correct?

Which of the following statements is correct?

a. In a direct-financing lease, initial direct costs are added to the net investment in the lease.
b. In a sales-type lease, initial direct costs are expensed in the year of incurrence.
c. For operating leases, initial direct costs are deferred and allocated over the lease term.
d. All of these.

Answer: D

For a sales-type lease,

For a sales-type lease,

a. the sales price includes the present value of the unguaranteed residual value.
b. the present value of the guaranteed residual value is deducted to determine the cost of goods sold.
c. the gross profit will be the same whether the residual value is guaranteed or unguaranteed.
d. none of these

Answer: C

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 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 present value of the minimum lease payments.
c. The cost of the asset to the lessor, less the present value of any unguaranteed residual value.
d. The present value of the minimum lease payments plus the present value of the unguaranteed residual value.

Answer: B

The primary difference between a direct-financing lease and a sales-type lease is the

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

Answer: C

The initial direct costs of leasing

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.

Answer: C

When lessor's account for residual values related to leased assets, they

When lessor's 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.

Answer: A

If the residual value of a leased asset is guaranteed by a third party

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.

Answer: D

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

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 market 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.

Answer: C

In a lease that is appropriately recorded as a direct-financing lease by the lessor, unearned income

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.

Answer: A

Which of the following would not be included in the Lease Receivable account?

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

Answer: D

A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over the

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.

Answer: A

In the earlier years of a lease, from the lessee's perspective, the use of the

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.

Answer: B

In computing depreciation of a leased asset, the lessee should subtract

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.

Answer: A

In computing the present value of the minimum lease payments, the lessee should

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.

Answer: C

Executory costs include

Executory costs include

a. maintenance.
b. property taxes.
c. insurance.
d. all of these.

Answer: D

Minimum lease payments may include a

Minimum lease payments may include a

a. penalty for failure to renew.
b. bargain purchase option.
c. guaranteed residual value.
d. any of these.

Answer: D