Accounting for leases Questions and Answers | Complete!
Major reasons why a company may become involved in leasing to other companies is -Answer- tax
incentives.
Which of the following is an advantage of captive leasing companies over the other players in the leasing
market? -Answer- They provide leasing arrangements for a wider range of products than the parent
company's product line.
Which of the following best describes current practice in accounting for leases? -Answer- Leases similar
to installment purchases are capitalized.
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 -
Answer- a lease reflects the purchase or sale of a quantifiable right to the use of property.
An essential element of a lease is that the -Answer- lessor conveys less than his or her total interest in
the property.
What impact does a bargain purchase option have on the present value of the minimum lease payments
computed by the lessee? -Answer- The lessee must increase the present value of the minimum lease
payments by the present value of the option price
The amount to be recorded as the cost of an asset under capital lease is equal to the -Answer- present
value of the minimum lease payments or the fair value of the asset, whichever is lower.
The methods of accounting for a lease by the lessee are -Answer- operating and capital lease methods.
Which of the following is a correct statement of one of the capitalization criteria? -Answer- The lease
term is equal to or more than 75% of the estimated economic life of the leased property.
, Minimum lease payments may include a -Answer- any of these.
In computing depreciation of a leased asset, the lessee should subtract -Answer- a guaranteed residual
value and depreciate over the term of the lease.
In computing the present value of the minimum lease payments, the lessee should -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.
Lessees prefer to account for their leases as operating lease because: -Answer- it decreases the amount
of liability reported.
From the lessee's perspective, in the earlier years of a lease, the use of the -Answer- capital method will
cause debt to increase, compared to the operating method
A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset
over the -Answer- asset's remaining economic life
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? -Answer- No Yes Yes No
Which of the following would not be included in the Lease Receivable account? -Answer- All would be
included
In a lease that is appropriately recorded as a direct-financing lease by the lessor, the unearned income -
Answer- should be amortized over the period of the lease using the effective interest method.
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 -Answer- the present value
of minimum lease payments.
If the residual value of a leased asset is guaranteed by a third party -Answer- it is treated by the lessee
as an additional payment and by the lessor as realized at the end of the lease term.
Major reasons why a company may become involved in leasing to other companies is -Answer- tax
incentives.
Which of the following is an advantage of captive leasing companies over the other players in the leasing
market? -Answer- They provide leasing arrangements for a wider range of products than the parent
company's product line.
Which of the following best describes current practice in accounting for leases? -Answer- Leases similar
to installment purchases are capitalized.
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 -
Answer- a lease reflects the purchase or sale of a quantifiable right to the use of property.
An essential element of a lease is that the -Answer- lessor conveys less than his or her total interest in
the property.
What impact does a bargain purchase option have on the present value of the minimum lease payments
computed by the lessee? -Answer- The lessee must increase the present value of the minimum lease
payments by the present value of the option price
The amount to be recorded as the cost of an asset under capital lease is equal to the -Answer- present
value of the minimum lease payments or the fair value of the asset, whichever is lower.
The methods of accounting for a lease by the lessee are -Answer- operating and capital lease methods.
Which of the following is a correct statement of one of the capitalization criteria? -Answer- The lease
term is equal to or more than 75% of the estimated economic life of the leased property.
, Minimum lease payments may include a -Answer- any of these.
In computing depreciation of a leased asset, the lessee should subtract -Answer- a guaranteed residual
value and depreciate over the term of the lease.
In computing the present value of the minimum lease payments, the lessee should -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.
Lessees prefer to account for their leases as operating lease because: -Answer- it decreases the amount
of liability reported.
From the lessee's perspective, in the earlier years of a lease, the use of the -Answer- capital method will
cause debt to increase, compared to the operating method
A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset
over the -Answer- asset's remaining economic life
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? -Answer- No Yes Yes No
Which of the following would not be included in the Lease Receivable account? -Answer- All would be
included
In a lease that is appropriately recorded as a direct-financing lease by the lessor, the unearned income -
Answer- should be amortized over the period of the lease using the effective interest method.
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 -Answer- the present value
of minimum lease payments.
If the residual value of a leased asset is guaranteed by a third party -Answer- it is treated by the lessee
as an additional payment and by the lessor as realized at the end of the lease term.
