CLFP Financial and Tax Accounting for Leases: Exam Questions With Correct Answers Latest 2024/2025 (GRADED)

CLFP Financial and Tax Accounting for Leases: Exam Questions With Correct Answers Latest 2024/2025 (GRADED) How did APB (Accounting Principals Board) fail? correct answerCreated Opinion #5 (Reporting of Leases in Financial Statements of Lessees) and Opinion #7 (Accounting for Leases in Financial Statements for Lessors) that ha different opinions and left lessors & lessees with conflicting rules. What was FASB 13? correct answerFinancial Accounting Standards Board issued "Accounting for Leases" which was a comprehensive set of standards to be followed by lessors and lessees in accounting lease transactions. What is Accounting Standards Codification? correct answerApproved by FASB in 7/2009, a single source of of authoritative US accounting and reporting standards What now governs lease accounting? correct answerASC 840 What is a Bargain Renewal Option? correct answera provision allowing lessee, at his option, to renew the lease for a rental sufficiently lower than the expected fair value of the property at the date the option becomes excercisable. It is reasonably assured the renewal option will be exercised. What is a Bargain Purchase Option? correct answera provision allowing lessee, at his option, to purchase the property for a price sufficiently lower than the expected fair market value of the property at the date the option becomes excercisable. It is reasonably assured the purchase option will be exercised. What are Contingent Rentals? correct answerRentals that represent increases or decreases in the lease payments made that result from changes in the factors on which lease payments are based occurring subsequent to the inception of the lease. Increases may occur due to increased construction cost or indexed interest rates. CLFP EXAM, Financial and Tax Accounting for Leases Questions and Answers – Latest 2024/2025 What is Economical Useful Life of Leased Property? correct answerAt the inception of the the lease, the estimated remaining period during which the property is expected to be economically usable for its intended purpose by one or more users. This may be impacted by usage, technology and deterioration. Independent of lease term. What is Residual Value of Leased Property? correct answerEstimated fair value of the lease property at the end of the lease. What is Executory Costs? correct answerThe costs such as insurance, maintenance and taxes incurred for the leased property, whether paid by lessor or lessee. Also include costs paid by lessee as guarantor. What is Value of Leased Property? correct answerThe price at which the property could be sold at an arm's length transaction by unrelated parties. 1.) normal selling price, net volume discounts, for a lessor who manufacturer/dealer 2.) Cost, net volume discounts for a lessor that is note a manufacturer or dealer. What is Implicit Interest Rate? correct answerThe discount rate that, when applied to the minimum lease payments cause the aggregate present value at the beginning of the lease term to be equal to the fair value of the leased property to the lessor at the inception of the lease. What is Inception of the Lease? correct answerThe date lease commitment. What is Incremental Borrowing Rate? correct answerThe rate, at the inception of the lease, the lessee would have incurred to borrow, under like terms, the funds necessary to purchase the lease asset. What is Initial Direct Cost (IDC)? correct answerCosts incurred by lessor that are 1) to originate the lease in transactions with independent third parties that are required and would have occurred regardless of leasing 2.) certain cost incurred by the lessor What is a Lease? correct answerAn agreement conveying right to use property, plant or equipment for stated period of time and rental payment. What is Lease Term? correct answerThe fixed, non cancel-able term of the lease plus: 1.) period covered by bargain renewal options 2.) period covered by a renewal when a significant penalty for failure to renew exists; 3.) Ordinary renewal periods 4.) Renewal periods that precede a bargain purchase option. 5.) Renewal periods that are at the option of the lessor 6.) does not exceed term beyond when the bargain purchase option can be exercised. What is Maximum Lease Payments? correct answerAll payments the lessee is obligated to make under the lease agreement (outside of executory costs) 1.) minimum rentals 2.) Lessee guarantee of the residual value 3.) Penalties for failure to renew. 4.) Calc for lessor to include guaranteed residual What is a Non-Cancelable Lease? correct answerA lease that is only cancelable upon: 1.) Occurrence of some remote contingency; 2.) Permission of lessor; 3.) Entrance into a new lease with the same lessor; 4.) Payment of a penalty in an amount that makes continuation of the lease reasonably assured. What is Renewal or Extension of a Lease? correct answerThe continuation of a lease agreement beyond the original term, including a new lease where the lessee continues to use the same property. What is Sale-Leaseback Accounting? correct answerA method of accounting for transactions in which the seller-lessee records the sale , removes the property and related liabilities from its balance sheet, recognizes gain or loss from the sale and classifies the leaseback in accordance with proper lease accounting What is Unguaranteed Residual Value? correct answerThe estimated residual value of the leased property exclusive of any portion guaranteed by the lessee or by a third party unrelated to the lessor. If the guarantor is related to the lessor, the residual value is considered unguaranteed What are the three types of Lessor Financial Statements classification? correct answer1.) Operating 2.) Direct financing (capital lease) 3) Sale-type (capital lease) 4) If lender is lending cash - typically capital lease 5) If lender is lending assets - typically operating lease What dictates the proper treatment of a lease on the lessors books? correct answerASC 840. If any of the following are met at time of lease inception, capital lease treatment is required. 1). transfer of ownership at lease end; 2.) bargain purchase option; 3.) lease term = 75% property economic useful life 4.) PV of payments 90% of fair value (less tax credits) If a criteria of ASC 840 is met, what additional criteria must be met to classify as a capital lease? correct answerIn addition to meeting an ASC 840 criteria, both of the following must be met to classify as capital lease: 1). collectibility is reasonably certain; 2.) No important uncertainties surround the amount of the non-reimbursable costs to be incurred by the lessor under the lease. How should manufacturer account for a sale-type lease? correct answer1.) take sale profit, or 2.) capitalize the expense as IDC 3.) Can't to both How should a lessor account for a direct finance lease? correct answerNet investment (book value) in the lease is recorded as an asset on the balance sheet: +Gross Investment - Unearned Income = Net Investment What is Gross Investment? correct answerThe sum of all the min. lease payments plus the unguaranteed residual value. What is Unearned Income? correct answerIs the gross investment less asset cost