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

Which of the following is a correct statement of one of the capitalization criteria?

Which of the following is a correct statement of one of the capitalization criteria?

a. The lease transfers ownership of the property to the lessor.
b. The lease contains a purchase option.
c. The lease term is equal to or more than 75% of the estimated economic life of the leased property.
d. The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property.


Answer: The lease contains a purchase option

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: All would be included

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: any of these

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 answers are correct.


Answer: 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

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 guaranteed residual value and depreciate over the term of the lease

Lessees prefer to account for their leases as operating lease because:

a. it increases their debt to total equity ratio.
b. it decreases the income tax expense.
c. it increases the amount of total assets.
d. it decreases the amount of liability reported.


Answer: it decreases the amount of liability reported

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

Which of the following is an advantage of captive leasing companies over the other players in the leasing market?

Which of the following is an advantage of captive leasing companies over the other players in the leasing market?

a. They have access to low-cost funds allowing them to purchase assets at lower cost.
b. They are good at developing innovative contracts that help avoid accounting problems.
c. They provide leasing arrangements for a wider range of products than the parent company's product line.
d. They have the paint-of-sale advantage in finding leasing customers.


Answer: They have the paint-of-sale advantage in finding leasing customers

Which of the following best describes current practice in accounting for leases?

a. Leases are not capitalized.
b. Leases similar to installment purchases are capitalized.
c. All long-term leases are capitalized.
d. All leases are capitalized.


Answer: Leases similar to installment purchases are capitalized

The amount to be recorded as the cost of an asset under capital lease is equal to the

a. present value of the minimum lease payments.
b. present value of the minimum lease payments or the fair value of the asset, whichever is lower.
c. present value of the minimum lease payments plus the present value of any unguaranteed residual value.
d. carrying value of the asset on the lessor's books.


Answer: present value of the minimum lease payments or the fair value of the asset, whichever is lower

While only certain leases are currently accounted for as a sale or purchase, there is theoretic justification for considering all leases

While only certain leases are currently accounted for as a sale or purchase, there is theoretic justification for considering all leases to be sales or purchases. The principal reason that supports this idea is that

a. all leases are generally for the economic life of the property and the residual value of the property at the end of the lease is minimal.
b. at the end of the lease the property usually can be purchased by the lessee.
c. a lease reflects the purchase or sale of a quantifiable right to the use of property.
d. during the life of the lease the lessee can effectively treat the property as if it were owned.


Answer: a lease reflects the purchase or sale of a quantifiable right to the use of property

Major reasons why a company may become involved in leasing to other companies is (are)

a. interest revenue.
b. high residual values.
c. tax incentives.
d. All of these answers are correct.


Answer: All of these answers are correct

The main purpose of the Pension Benefit Guaranty Corporation is to

a. require minimum funding of pensions.
b. require plan administrators to publish a comprehensive description and summary of their plans.
c. administer terminated plans and to impose liens on the employer's assets for certain unfunded pension liabilities.
d. All of these answers are correct.


Answer: administer terminated plans and to impose liens on the employer's assets for certain unfunded pension liabilities

According to the FASB, recognition of a liability is required when the projected benefit obligation exceeds the fair value of plan assets

According to the FASB, recognition of a liability is required when the projected benefit obligation exceeds the fair value of plan assets. Conversely, when the fair value of plan assets exceeds the projected benefit obligation, the Board

a. requires recognition of an asset.
b. requires recognition of an asset if the excess fair value of plan assets exceeds the corridor amount.
c. recommends recognition of an asset but does not require such recognition.
d. does not permit recognition of an asset.


Answer: requires recognition of an asset

Which of the following statements is true about postretirement health care benefits?

a. They are generally funded.
b. The benefits are well-defined and level in dollar amount.
c. The beneficiary is the retiree, spouse, and other dependents.
d. The benefit is payable monthly.


Answer: The beneficiary is the retiree, spouse, and other dependents

Which of the following disclosures of pension plan information would not normally be required?

a. The major components of pension expense
b. The amount of prior service cost changed or credited in previous years.
c. The funded status of the plan and the amounts recognized in the financial statements
d. The rates used in measuring the benefit amounts


Answer: The amount of prior service cost changed or credited in previous years