Chapter 21 1-51

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Section 1

Question Answer
Leasing equipment reduces the risk of obsolescence to the lessee, and passes the risk of residual value to the lessor.True
The FASB agrees with the capitalization approach and requires companies to capitalize all long-term leases.False
A lease that contains a purchase option must be capitalized by the lessee.False
Executory costs should be excluded by the lessee in computing the present value of the minimum lease payments.True
A capitalized leased asset is always depreciated over the term of the lease by the lessee.False
A lessee records interest expense in both a capital lease and an operating lease.False
A benefit of leasing to the lessor is the return of the leased property at the end of the lease term.True
The distinction between a direct-financing lease and a sales-type lease is the presence or absence of a transfer of title.False
Lessors classify and account for all leases that don’t qualify as sales-type leases as operating leases.False
Direct-financing leases are in substance the financing of an asset purchase by the lessee.True

Section 2

Question Answer
Under the operating method, the lessor records each rental receipt as part interest revenue and part rental revenue.False
In computing the annual lease payments, the lessor deducts only a guaranteed residual value from the fair market value of a leased asset.False
When the lessee agrees to make up any deficiency below a stated amount that the lessor realizes in residual value, that stated amount is the guaranteed residual value.True
Both a guaranteed and an unguaranteed residual value affect the lessee’s computation of amounts capitalized as a leased asset.False
From the lessee’s viewpoint, an unguaranteed residual value is the same as no residual value in terms of computing the minimum lease payments.True
The lessor will recover a greater net investment if the residual value is guaranteed instead of unguaranteed.False
The primary difference between a direct-financing lease and a sales-type lease is the manufacturer’s or dealer’s gross profit.True
The gross profit amount in a sales-type lease is greater when a guaranteed residual value exists.False
Companies must periodically review the estimated unguaranteed residual value in a sales-type lease.True
The FASB requires lessees and lessors to disclose certain information about leases in their financial statements or in the notes.True

Section 3

Question Answer
Major reasons why a company may become involved in leasing to other companies is (are)interest revenue, high residual values, and tax incentives
Which of the following is an advantage of leasing?Off-balance-sheet financing, less costly financing, 100% financing at fixed rates
Which of the following best describes current practice in accounting for leases?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 thata lease reflects the purchase or sale of a quantifiable right to the use of property
An essential element of a lease conveyance is that thelessor 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?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 thepresent 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 areoperating and capital lease methods.
Which of the following is a correct statement of one of the capitalization criteria?The lease term is equal to or more than 75% of the estimated economic life of the leased property.
Minimum lease payments may include apenalty for failure to renew, bargain purchase option, guaranteed residual value

Section 4

Question Answer
Executory costs includemaintenance, property taxes, and insurance
In computing the present value of the minimum lease payments, the lessee shoulduse 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 subtracta guaranteed residual value and depreciate over the term of the lease.
In the earlier years of a lease, from the lessee's perspective, the use of thecapital 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 theasset'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?Transfers Ownership by end of lease? No, Contains Bargain Purchase Options? Yes. Collectbility of Lease Payments Assured? Yes. Any Important Uncertainities? No.
Which of the following would not be included in the Lease Receivable account?Guaranteed residual value, Unguaranteed residual value, and a bargain purchase option
In a lease that is appropriately recorded as a direct-financing lease by the lessor, unearned incomeshould 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 asthe present value of minimum lease payments.
If the residual value of a leased asset is guaranteed by a third partyit is treated by the lessee as no residual value.

Section 5

Question Answer
When lessors account for residual values related to leased assets, theyalways include the residual value because they always assume the residual value will be realized.
The initial direct costs of leasingare expensed in the period of the sale under a sales-type lease.
The primary difference between a direct-financing lease and a sales-type lease is therecognition of the manufacturer's or dealer's profit at the inception of the lease.
A lessor with a sales-type lease involving an unguaranteed residual value available to the lessor at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts?The present value of the minimum lease payments.
For a sales-type lease,the gross profit will be the same whether the residual value is guaranteed or unguaranteed.
Which of the following statements is correct?In a direct-financing lease, initial direct costs are added to the net investment in the lease, In a sales-type lease, initial direct costs are expensed in the year of incurrence, and For operating leases, initial direct costs are deferred and allocated over the lease term.
The Lease Liability account should be disclosed ascurrent portions in current liabilities and the remainder in noncurrent liabilities.
To avoid leased asset capitalization, companies can devise lease agreements that fail to satisfy any of the four leasing criteria. Which of the following is not one of the ways to accomplish this goal?Write in a bargain purchase option.
If the lease in a sale-leaseback transaction meets one of the four leasing criteria and is therefore accounted for as a capital lease, who records the asset on its books and which party records interest expense during the lease period?Party recording the asset on its books: Seller-lessee. Party recording interest expense: Seller-lessee.
In a sale-leaseback transaction where none of the four leasing criteria are satisfied, which of the following is false?The purchaser-lessor records a gain.
When a company sells property and then leases it back, any gain on the sale should usually bedeferred and recognized as income over the term of the lease.

Section 6