Problem 11 – 7 Multiple Choice (IAA)

1. Which of the following statements is correct regarding the lease capitalization

criteria?

a. The lease transfers ownership of the asset to the lessor

b. The lease contains purchase option
c. The lease term is equal to 75% of the economic life of the leased asset
d. The minimum lease payments are at least 90% of the fair value of the leased
asset

2. Which of the following conditions would require lease capitalization?

a. The lease does not transfer title of the leased asset to the lessee
b. There is no bargain purchase option
c. The present value of minimum lease payments is significantly more than the fair
value of the leased asset
d. The leased term is significantly below the useful life of the leased asset

3. Which of the following best describes current practice in accounting lease?

a. Leases are not capitalized

b. Leases similar to installment purchases are capitalized
c. All long term leases are capitalized
d. All lease are capitalized

4. An entity signed a lease to rent equipment for ten years. At the end of the lease term,

the entity may purchase the equipment for a nominal amount, the equipment is
estimated to have a useful life of 12 years. How should the entity classify the lease?

a. Operating lease
b. Capital lease
c. Finance lease
d. Sales type lease

5. What is the interest rate used by a lease to capitalize a finance lease when the
implicit rate cannot be determined?

a. Primary rate
b. Lessor’s published rate
c. Lessee’s average borrowing rate
d. Lessee’s incremental rate
6. Executor costs includes all of the following, except

a. Maintenance
b. Property taxes
c. Insurance
d. Bargain purchase option

7. In computing depreciation of a leased asset under a finance lease, the lessee should
deduct

a. An guaranteed residual value and depreciate over the lease term

b. An unguaranteed residual value and depreciate over the lease term
c. An guaranteed residual value and depreciate over the life of the asset
d. An unguaranteed residual value and depreciate over the life of the asset

8. The lease liability should be classified as

a. All current
b. All noncurrent
c. Partly current and partly noncurrent
d. Deferred credit

9. A lessee with a finance lease containing bargain purchase option should depreciate
the leased asset over the

a. Useful life of the asset

b. Lease term
c. Useful life of the asset or lease term whichever is shorter
d. Useful life of the asset or lease term whichever is longer

10. Which of the following statement is true about accounting for lease?

a. All leases are treated as finance lease

b. All leases are treated as operating lease
c. When land and building are leased, elements of the lease are considered
separately in accounting for lease
d. Operating leases are never recorded in the statement of financial position

Problems 12-1 Multiple Choice

1. Gross investment in the lease is the

a. Aggregate of the minimum lease payments under a finance lease of the lessor
and any unguaranteed residual value accruing to the lessor.
b. The minimum lease payments under a finance lease of the lessor.
c. Present value of minimum lease payments under a finance lease of the lessor
and any unguaranteed residual value.
d. Present value of minimum lease payments under a finance lease of the lessor.

2. Net investment in a direct financing lease is equal to

a. Cost of the asset

b. Cost of the asset plus initial direct cost paid by the lessor
c. Cost of the asset minus guaranteed residual value
d. Cost of the asset plus unguaranteed residual value

3. Which is the correct accounting treatment for a finance lease in the accounts of a
lessor?

a. Treat as a noncurrent asset equal to net investment in lease and recognize all
finance payments in income statement.
b. Treat as a receivable equal to gross amount receivable on lease and recognize
finance payments in cash by reducing debt.
c. Treat as a receivable equal to net investment in the lease and recognize finance
payments by reducing debt and taking interest to income statement.
d. Treat as a receivable equal to net investment in the lease and recognize finance
payments in cash by reduction of debt.

4. Lessors shall recognize asset held under a finance lease as a receivable at an

amount equal to the

a. Gross investment in the lease

b. Net investment in the lease
c. Gross rentals
d. Residual value, whether guaranteed or unguaranteed

5. Under a direct financing lease, the excess of aggregate rentals over the cost of
leased property shall be recognized as income of the lessor

a. In increasing amounts during the term of the lease

b. In constant amounts during the term of the lease
c. In decreasing amount during the term of the lease
d. After the cost of leased property has been fully recognized through rentals