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c249 CH21
Leases
| Question | Answer |
|---|---|
| The company places a premium on a flexible and innovative lease tailored to its specific situation. Which type of lessor should JT consider for this lease? | an independent |
| The company has never made widgets before and would like to lease the equipment through a lessor with a high degree of product knowledge. Which type of lessor should JT consider for this lease? | a captive leasing company |
| Which of the following best describes the reason why banks, captive leasing companies, and independents typically become involved with leasing to other companies? | They can eliminate the risk of obsolescence |
| True or false: The FASB agrees with the capitalization approach for leases when the lease is similar to an installment purchase. | True |
| From a theoretical standpoint, which of the following BEST supports the notion that all leases be considered sales or purchases? | A lease reflects the purchase or sale of a quantifiable right to the use of property. |
| Which of the following is considered an essential element of a lease? | The lessor conveys the right to use the property to the lessee. |
| Which of the following most accurately describes the relationship of an uncapitalized lease to a company’s debt to equity ratio? | There is no relationship; uncapitalized leases do not affect financial ratios. |
| True or False: Leasing equipment reduces the risk of obsolescence to the lessor and in many cases passes the risk of residual value to the lessee. | False |
| What is one advantage that independent lessors have over banks and captive leasing companies? | Independent lessors are often good at developing innovative lease contracts for lessees. |
| according to the viewpoint of lease capitalization supported by the FASB, why should a 10-year lease agreement be handled in the same manner as a 10-year mortgage? | Both transactions are similar to each other in economic substance. |
| Which of the following statements does NOT describe an advantage of leasing? | Interest rates for leasing are always lower. |
| What impact do uncapitalized leases have on a company’s financial ratios? | They have no effect on financial ratios. |
| How could a company with a very low level of taxable income benefit from depreciation deductions on a leased asset? | The lessor could claim the deductions and pass the benefit on to the lessee via lower lease payments. |
| Which of the following statements about independent lessors is TRUE? | Independent lessors have seen a drop in market share in recent years. |
| What are the requirements for a capital lease? | noncancelable, transfers ownership, contains a bargain-purchase option, 75 percent or more of the estimated economic life, present value of the minimum lease payments (excluding executory costs) equals or exceeds 90 percent of the fair value |
| Which of the following is a disadvantage of capital leases compared to operating leases? | Capital leases more easily lead to violation of loan covenants. |
| True or False: Only a capital lease will have the effect of increasing both total assets and total liabilities. | True |
| Compared to the period before the lease agreement was signed, which of the following statements will be true of capital leases but not operating leases? | Total assets and total liabilities will both increase. |
| If a capital lease has a bargain purchase option, the leased asset should be depreciated over the | asset’s remaining economic life. |
| In the early years of a capital lease, the company will report ________ than in the early years of a similar operating lease. | lower retained earnings |
| True or False: Operating leases transfer the benefits and risks of ownership from the lessor to the lessee. | False |
| For which of the following reasons do lessees prefer to account for their leases as operating leases? | It decreases the amount of liabilities reported. |
| When comparing total charges to operations over a lease term, | charges are the same for a capital lease as an operating lease. |
| Which of the following is true about the earlier years of a lease from the lessee’s perspective? | The capital method will cause debt to increase, compared to the operating method. |
| Why does capitalization of a lease make companies less attractive to investors? | It has the effect of decreasing rates of return. |
| When compared to straight-line depreciation, how does an accelerated method of depreciation affect the difference in amounts charged to operations between a capital lease and an operating lease? | It makes the difference larger in earlier and later years. |
| Companies are more likely to violate loan covenants for ________ leases than ________ leases. | capital; operating |
| Which of the following characterizes a capital lease versus an operating lease in the earlier years of the lease? | The capital lease will have higher charges in the earlier years. |
| True or False: Interest expense should be reported by the lessee regardless of whether they have a capital lease or an operating lease. | False |
| True or False: For the lessor, leasing assets is beneficial because the leased property will often be returned at the end of the lease term. | True |
| Which of the following statements about retained earnings related to leases is true? | Retained earnings will be lower in the earlier years of a capital lease compared to an operating lease. |
| What are the 4 parts that make up minimum lease payments? | minimum rental payments, guaranteed residual value, bargain purchase option, penalty for failure to renew |
| What are the 4 parts of the present value of minimum lease payments? | minimum lease payments, discount rate, and executory costs |
| What amount should a company record as the cost of an asset if the lease is capitalized? | The present value of the minimum lease payments or the fair value of the asset, whichever is lower. |
| Commitments to make future payments should be ________ when preparing entries for an operating lease. | ignored |
| True or false: If the present value of the minimum lease payments is substantially all of the fair value of the asset, GAAP specifies that the lease must be capitalized. | True |
| Which of the following correctly states how a lessee should compute depreciation of a leased asset when there is no bargain purchase option or title transfer? | They should subtract the guaranteed residual value and depreciate the asset over the term of the lease. |
| If a company signed a 10-year lease that requires equal annual payments, what should the reduction of the lease liability in year 2 equal? | The current liability shown for the lease at the end of year 1. |
| When accounting for a direct-financing lease, the lessor should record a credit to Lease Receivable in which of the following circumstances? | upon receipt of a lease payment |
| When referring to a direct-financing lease, what is the lease receivable? | |
| Which of the following journal entries would you LEAST expect to see in the lessor’s books in relation to a direct-financing lease? | Debit to Depreciation Expense |
| True or False: In a direct-financing lease, any guaranteed residual value should be included in calculation of the present value of the minimum lease payments. | True |
| When a lessor receives the first year’s lease payment on a direct-financing lease, it should record the payment amount as a | credit to Lease Receivable. |
| Which of the following journal entries would you LEAST expect to see in the lessor’s books in relation to an operating lease? | Debit to Interest Receivable |
| Which of the following journal entries would you MOST expect to see in the lessor’s books in relation to an operating lease? | Debit to Depreciation Expense |
| When accounting for a direct-financing lease, the lessor should record a credit to Lease Receivable in which of the following circumstances? | upon receipt of a lease payment |
| When referring to a direct-financing lease, what is the lease receivable? | It is the present value of the minimum lease payments. |
| Which of the following journal entries would you MOST expect to see in the lessor’s books in relation to a direct-financing lease? | Debit to Interest Receivable |
| When accounting for a direct-financing lease, how should the lessor treat interest income? | |
| The presence of a residual value, whether guaranteed or unguaranteed, often results in which of the following? | lower annual lease payments |
| In what way does a bargain-purchase option make accounting more complex for lease arrangements? | It changes how the minimum lease payment is calculated. |
| How is sales revenue reported in the period of the inception of a lease if the lessor uses a sales-type lease involving an unguaranteed residual value? | As the present value of the minimum lease payments. |
| True or False: Calculation of the manufacturer’s or dealer’s gross profit (or loss) is the primary difference between a direct-financing lease and a sales-type lease. | True |
Created by:
tbeeche