Chapter 12

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Chapter 12
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2012-04-19 19:19:35
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  1. 1. When a company has an operating lease for its primary premises it would record a lease asset on the balance sheet equal to zero. (T/F)
    TRUE
  2. 2. When accounting for an operating lease, depreciation expense is recorded by the lessee. (T/F)
    FALSE
  3. 3. When accounting for an operating lease, a liability is recognized when the lease is signed by the lessee. (T/F)
    FALSE
  4. 4. When accounting for an operating lease, interest expense is recognized over the lease term by the lessee. (T/F)
    FALSE
  5. 5. To remain in accordance with GAAP, operating leases require footnote disclosure of the future cash flows arising from operating leases. (T/F)
    TRUE
  6. 6. Operating leases are financial statement examples of off balance sheet financing. (T/F)
    TRUE
  7. 7. Compared to a firm with a capital lease, operating leases help the lessee firm earn a higher return on assets. (T/F)
    TRUE
  8. 8. If a lessee mistakenly treats a capital lease as an operating lease, both assets and liabilities would be understated at the inception of the lease. (T/F)
    TRUE
  9. 9. Firms that have operating leases protect future earnings. (T/F)
    FALSE
  10. 10. Treating a lease as an operating lease rather than a capital lease results in an increase in the return-on-assets (ROA) ratio. (T/F)
    TRUE
  11. 11. SFAS No. 13 has established specific criteria for the treatment of leases. If any of the criteria are met, the lessee must treat the lease as an operating lease. (T/F)
    FALSE
  12. 12. SFAS No. 13 has established specific criteria for the treatment of leases. One of the criteria states that the lessee must capitalize a lease if the present value of the minimum lease payments is greater than or equal to 75% of the leased asset's fair value. (T/F)
    FALSE
  13. 13. SFAS No. 13 has established specific criteria for the treatment of leases. One of the criteria states that the lessee must capitalize a lease if the lease agreement contains a bargain purchase option. (T/F)
    TRUE
  14. 14. A lessee must use the incremental borrowing rate to value a capital lease. (T/F)
    FALSE
  15. 15. The lessee must depreciate a leased asset over the lease term assuming that any one of the four lease criteria applicable to the lessee are met. (T/F)
    FALSE
  16. 16. If a lease agreement contains a bargain purchase option, the lessee must depreciate the leased asset over the asset's useful life rather than over the lease term. (T/F)
    TRUE
  17. 17. Executory costs of a lease are treated as operating expenses by the lessee. (T/F)
    TRUE
  18. 18. The annual expense associated with a capital lease decreases over the term of the lease. (T/F)
    TRUE
  19. 19. Executory costs paid by the lessee associated with a capital lease are recorded as a component of the lease liability. (T/F)
    FALSE
  20. 20. If a lease contains a residual value guarantee, the lessee must add the guaranteed amount to the present value of the minimum lease payments. (T/F)
    FALSE
  21. 21. A lessee will record a leased asset at the lower of the present value of the minimum lease payments or the leased asset's fair value when the lease is a capital lease. (T/F)
    FALSE
  22. 22. A lessee's minimum lease payments includes a residual value guarantee. (T/F)
    TRUE
  23. 23. Residual value guarantees protect lessors against lessees who abuse leased assets. (T/F)
    TRUE
  24. 24. The amount charged to expense over the life of a lease is the same for operating and capital leases. (T/F)
    TRUE
  25. 25. Managers prefer that leases be treated as capital leases. (T/F)
    FALSE
  26. 26. The current ratio deteriorates with the capitalization of a lease. (T/F)
    TRUE
  27. 27. When a lease meets one of the Type I criteria and both of the Type II criteria, the lessor must treat the lease as a capital lease. (T/F)
    TRUE
  28. 28. SFAS No. 13 defines lessors' treatment of leases according to Type I and Type II characteristics. Type I characteristics are linked to the critical event criteria for revenue recognition. (T/F)
    TRUE
  29. 29. For a lessor using the operating method of recording a lease, income is recognized evenly throughout the term of the lease, if the lessor uses straight-line depreciation. (T/F)
    TRUE
  30. 30. Gross Investment in Leased Asset is classified on a lessor's balance sheet as a current asset. (T/F)
    TRUE
  31. 31. The lessor recognizes both gross profit and interest income during the first year of the lease term when the lease is classified as a sales-type lease. (T/F)
    TRUE
  32. 32. The gross profit earned by the lessor is the same whether the residual value is guaranteed or unguaranteed. (T/F)
    TRUE
  33. 33. The lessor's lease receivable balance is the same at the end of the lease term whether the residual value is guaranteed or unguaranteed. (T/F)
    TRUE
  34. 34. The lessor does not have an asset recorded within their financial statements for a lease classified as a sales-type lease. (T/F)
    FALSE
  35. 35. If a company sells an asset for a profit of $175,000 and immediately leases it back with a capital lease, the gain on the sale is recognized immediately as an ordinary gain. (T/F)
    FALSE
  36. 36. The current ratio will be lower over the lease term when the lessee treats the lease as a capital lease rather than an operating lease. (T/F)
    TRUE
  37. 37. It is possible that the lessee and the lessor could both treat the same lease as a capital lease. (T/F)
    TRUE
  38. 38. With a leveraged lease, the lessor must treat the lease as a direct financing lease. (T/F)
    TRUE
  39. 39. For tax purposes lessee's prefer operating leases. (T/F)
    FALSE
  40. 40. The FASB and the IASB are working on a joint project which will ultimately result in more leases being treated as capital leases. (T/F)
    TRUE
  41. 41. A lease is legally a/an ___________ contract.
    C. executory
  42. 42. When accounting for an operating lease, which one of the following accounts are charged with the expense on the lessee's income statement?
    C. Rent Expense
  43. 43. The lessor of a building with an operating lease records on its balance sheet an asset equal to
    C. the depreciated historical cost of the asset.
  44. 44. To remain in accordance with GAAP, operating leases require footnote disclosure of the
    D. future cash outflows arising from operating leases.
  45. 45. Compared to a firm with a capital lease, operating leases help the lessee firm earn
    A. higher return on assets.
  46. 46. If a corporation signs a ten-year lease for a building and the present value of the lease payments is $250,000, the lease is a capital lease if the
    C. lessor can purchase the building for $5,000 at the end of the lease when the fair market value is estimated to be $25,000.
  47. 47. SFAS No. 13 establishes specific criteria for the treatment of leases. If any of the criteria are met, the lessee
    B. must treat the lease as a capital lease.
  48. 48. SFAS No. 13 establishes specific criteria for the treatment of leases. Which of the following does not accurately describe the criteria applicable to a lessee?
    D. The present value of the minimum lease payments is equal to or greater than 75% of the leased asset's fair value.
  49. 49. When a lessee has a capital lease for its primary premises it would initially record a leased asset on the balance sheet equal to
    D. the lesser of the fair market value of the asset or the present value of the future lease payments.
  50. 50. A lessee mistakenly treated an operating lease as a capital lease. How does this mistake impact the following at the inception of the lease?
    • B. Choice B
    • C. Choice C
    • 2 of the same questions with blank info, use best guess
  51. 52. A lessor mistakenly treated a direct financing lease as an operating lease. How does this mistake impact the following at the end of the first year of the lease term? (SHORT QUESTION!)
    A. Choice A
  52. 53. A lessor mistakenly treated a direct financing lease as an operating lease (the lessor uses straight-line depreciation). How does this mistake impact the following at the end of the first year of the lease term?
    B. Choice B
  53. 54. A lessee must use which one of the following discount rates to value a capital lease?
    D. Lower of implicit lease rate or lessee's incremental borrowing rate
  54. 55. When accounting for a capital lease, depreciation expense is equal to the
    C. normal depreciation computed on the depreciable base of the asset.
  55. 56. Executory costs of a lease are treated by the lessee as
    C. operating expenses.
  56. 57. If a lease contains a residual value guarantee, the lessee must
    B. add the present value of the guaranteed amount to the present value of the minimum lease payments.
  57. 58. All the following statements about residual value guarantees are correct except residual value guarantees
    B. protect lessees against lessors who abuse leased assets.
  58. 68. Over the life of a lease, the amount charged to expense is
    C. the same for a capital or operating lease.
  59. 69. The difference between the expense charged with a capital lease and an operating lease is
    D. the timing of the expense recognition.
  60. 70. To adjust for distortions that arise from off-balance sheet leases when comparing among firms, analysts rely on
    D. required footnote disclosures
  61. 71. Which one of the following ratios deteriorates with the capitalization of a lease?
    A. Current ratio
  62. 72. If a car dealership leases cars for four years with guaranteed purchase options, guaranteed residual values, and insured financing agreements, these leases are treated as
    C. sales-type leases.
  63. 73. Refer to Table 12-2. Blue Manufacturing treats a lathe lease as a/an
    C. sales-type lease.
  64. 76. SFAS No. 13 defines lessors' treatment of leases according to Type I and Type II characteristics. Type I characteristics are linked to
    B. the critical event criteria for revenue recognition.
  65. 77. SFAS No. 13 defines lessors' treatment of leases according to Type I and Type II characteristics. Type II characteristics are linked to
    C. measurement of collectibility for revenue recognition.
  66. 78. Refer to Table 12-3. On Ray's book, this lease is treated as a/an
    A. operating lease.
  67. 79. Refer to Table 12-3. On Ford's books, this lease is treated as a/an
    B. capital lease.
  68. 80. Refer to Table 12-3. Ford uses which one of the following interest rates to record this lease?
    D. Use 9.0% unless the fair value of the equipment is less than PV of the lease at 9% discount rate, when the rate must be computed.
  69. 81. Refer to Table 12-3. Assuming that the lease is a capital lease for Ray, which one of the following interest rates will Ray use to record this lease?
    C. Use 10.0% because it is the implicit lease rate of return to the lessor
  70. 82. Refer to Table 12-4. For Equity Leasing, this is treated as a/an
    C. direct financing capital lease.
  71. 83. Refer to Table 12-4. For Matty, this lease is treated as a/an
    B. capital lease.
  72. 94. The difference in the lessor's income recognition over the life of the lease, between an operating lease and a capital lease is
    A. zero.
  73. 95. Which of the following statements pertaining to lease accounting is not correct?
    B. The lessee ignores a guaranteed salvage value when calculating depreciation expense associated with a capital lease.
  74. 96. Which of the following statements pertaining to lease accounting is not correct?
    D. The SFAS 13 disclosures pertaining to operating leases require the lessee to disclose what the impact on the financial statements would have been if the lease would have been treated as a capital lease.
  75. 97. If a company sells an asset for a profit of $175,000 and immediately leases it back with a capital lease, the gain is recognized
    D. over the life of the lease using the same rate and life used to amortize the leased asset.
  76. 98. With a leveraged lease, the lessor must treat the lease as a/n
    C. direct financing capital lease.
  77. 99. The most straightforward method for making lessees' balance sheet data comparable is to treat all leases as if they were
    B. capital leases.
  78. 100. Which of the following is a reason why lease accounting under GAAP should be reconsidered?
    D. Each of the above are substantiated reasons.

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