Based solely upon the following sets of circumstances indicated below, which set gives rise to a sales-type or direct-financing lease of a lessor?

Based solely upon the following sets of circumstances indicated below, which set gives rise to a sales-type or direct-financing lease of a lessor?

Transfers Ownership Contains Bargain Collectibility of Lease Any Important
By End Of Lease? Purchase Option? Payments Assured? Uncertainties?


a. No Yes Yes No
b. Yes No No No
c. Yes No No Yes
d. No Yes Yes Yes


Answer: No Yes Yes No

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: asset's remaining economic life.

From the lessee's perspective, in the earlier years of a lease, 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: capital method will cause debt to increase, compared to the operating method

What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee?

What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee?

a. There is no impact as the option does not enter into the transaction until the end of the lease term.
b. The lessee must increase the present value of the minimum lease payments by the present value of the option price.
c. The lessee must decrease the present value of the minimum lease payments by the present value of the option price.
d. The minimum lease payments would be increased by the present value of the option price if, at the time of the lease agreement, it appeared certain that the lessee would exercise the option at the end of the lease and purchase the asset at the option price.


Answer: The lessee must increase the present value of the minimum lease payments by the present value of the option price

The methods of accounting for a lease by the lessee are

a. operating and capital lease methods.
b. operating, sales, and capital lease methods.
c. operating and leveraged lease methods.
d. None of these answers are correct.


Answer: operating and capital lease methods

An essential element of a lease is that the

a. lessor conveys less than his or her total interest in the property.
b. lessee provides a sinking fund equal to one year's lease payments.
c. property that is the subject of the lease agreement must be held for sale by the lessor prior to the drafting of the lease agreement.
d. term of the lease is substantially equal to the economic life of the leased property.


Answer: lessor conveys less than his or her total interest in the property