CLFP Exam – Financial and Tax Accounting for
Leases (Latest Exam Guide 2026)
CLFP Exam – Financial and Tax Accounting for Leases Practice Questions
Section 1: Core Concepts and Definitions
1. Under ASC 842, what is the key distinguishing factor between a Finance Lease
and an Operating Lease for the lessee?
Answer:
The key distinction lies in who effectively bears the risks and rewards of
ownership. A lease is classified as a Finance Lease for the lessee if it meets any
one of the following five criteria:
1. Transfer of Title: The lease transfers ownership of the underlying asset to
the lessee by the end of the lease term.
2. Purchase Option: The lease grants the lessee an option to purchase the
underlying asset that the lessee is reasonably certain to exercise.
3. Economic Life: The lease term is for the major part of the remaining
economic life of the underlying asset.
4. Present Value: The present value of the sum of the lease payments and any
residual value guaranteed by the lessee equals or exceeds substantially all
of the fair value of the underlying asset.
5. Specialized Asset: The underlying asset is of such a specialized nature that
it is expected to have no alternative use to the lessor at the end of the lease
term.
If none of these criteria are met, the lease is classified as an Operating Lease.
2. Define "Initial Direct Costs" (IDCs) and explain how they are accounted for by
the lessor under ASC 842 for (a) an Operating Lease and (b) a Sales-Type Lease.
, Answer:
Initial Direct Costs (IDCs) are incremental costs of a lease that would not have
been incurred if the lease had not been obtained (e.g., commissions, legal fees).
• (a) Operating Lease (Lessor): IDCs are deferred and amortized over the
lease term on a straight-line basis, generally in conjunction with the lease
income.
• (b) Sales-Type Lease (Lessor): IDCs are expensed at the lease
commencement date. They are included in the calculation of the selling
profit (i.e., they reduce the profit recognized at commencement).
Section 2: Lessee Accounting (ASC 842)
3. At the commencement of a 5-year Finance Lease, a lessee records a Right-of-
Use (ROU) Asset and a Lease Liability of $100,000. The implicit interest rate is
5%. What journal entries does the lessee make for the first lease payment of
$23,000?
Answer:
The first step is to separate the payment into its principal and interest
components.
• Interest Expense: $100,000 (Lease Liability) x 5% = $5,000
• Principal Reduction: $23,000 (Total Payment) - $5,000 (Interest) = $18,000
Journal Entries:
1. To record the lease payment:
o Debit: Lease Liability $18,000
o Debit: Interest Expense $5,000
o Credit: Cash $23,000
2. To record amortization of the ROU Asset (assuming straight-line):
Leases (Latest Exam Guide 2026)
CLFP Exam – Financial and Tax Accounting for Leases Practice Questions
Section 1: Core Concepts and Definitions
1. Under ASC 842, what is the key distinguishing factor between a Finance Lease
and an Operating Lease for the lessee?
Answer:
The key distinction lies in who effectively bears the risks and rewards of
ownership. A lease is classified as a Finance Lease for the lessee if it meets any
one of the following five criteria:
1. Transfer of Title: The lease transfers ownership of the underlying asset to
the lessee by the end of the lease term.
2. Purchase Option: The lease grants the lessee an option to purchase the
underlying asset that the lessee is reasonably certain to exercise.
3. Economic Life: The lease term is for the major part of the remaining
economic life of the underlying asset.
4. Present Value: The present value of the sum of the lease payments and any
residual value guaranteed by the lessee equals or exceeds substantially all
of the fair value of the underlying asset.
5. Specialized Asset: The underlying asset is of such a specialized nature that
it is expected to have no alternative use to the lessor at the end of the lease
term.
If none of these criteria are met, the lease is classified as an Operating Lease.
2. Define "Initial Direct Costs" (IDCs) and explain how they are accounted for by
the lessor under ASC 842 for (a) an Operating Lease and (b) a Sales-Type Lease.
, Answer:
Initial Direct Costs (IDCs) are incremental costs of a lease that would not have
been incurred if the lease had not been obtained (e.g., commissions, legal fees).
• (a) Operating Lease (Lessor): IDCs are deferred and amortized over the
lease term on a straight-line basis, generally in conjunction with the lease
income.
• (b) Sales-Type Lease (Lessor): IDCs are expensed at the lease
commencement date. They are included in the calculation of the selling
profit (i.e., they reduce the profit recognized at commencement).
Section 2: Lessee Accounting (ASC 842)
3. At the commencement of a 5-year Finance Lease, a lessee records a Right-of-
Use (ROU) Asset and a Lease Liability of $100,000. The implicit interest rate is
5%. What journal entries does the lessee make for the first lease payment of
$23,000?
Answer:
The first step is to separate the payment into its principal and interest
components.
• Interest Expense: $100,000 (Lease Liability) x 5% = $5,000
• Principal Reduction: $23,000 (Total Payment) - $5,000 (Interest) = $18,000
Journal Entries:
1. To record the lease payment:
o Debit: Lease Liability $18,000
o Debit: Interest Expense $5,000
o Credit: Cash $23,000
2. To record amortization of the ROU Asset (assuming straight-line):
