Questions and Answers
Which of the following best describes current practice in accounting for leases? (Select all that apply)
What supports the theoretical justification for considering all leases to be sales or purchases?
A lease reflects the purchase or sale of a quantifiable right to the use of property.
For which type of lease is a single lease expense recognized on the income statement?
An operating lease.
What is the amount recorded as the cost of an asset under a finance lease?
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What are the classifications of a lease by the lessee?
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What is a correct statement of one of the lease classification tests?
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In computing the present value of the lease payments, what should the lessee use?
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Which of the following is not one of the lease classification tests?
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From the lessee's perspective, how do finance leases compare to operating leases in the earlier years?
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A lessee with a finance lease containing a bargain purchase option should depreciate the leased asset over the:
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Which of the following is an advantage of leasing? (Select all that apply)
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Major reasons why a company may become involved in leasing to other companies is (are)
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Study Notes
Accounting for Leases
- Current practice generally does not capitalize all leases; only specific types are capitalized.
- Operating leases typically result in a single expense recognized on the income statement, while finance leases have different treatment.
Lease Types and Accounting Treatment
- Lessees classify leases as either operating or finance leases.
- Finance lease assets are recorded at the present value of lease payments.
- A lease often reflects the right to use property, akin to a sale or purchase, justifying different accounting treatments.
Classification Tests
- Key tests for lease classification include:
- Lease payments equaling 90% of the property's fair value.
- Lease term being 75% or more of the economic life of the asset.
- Transfer of ownership at lease end.
- Collectibility of lease payments is not a classification test.
Present Value Computation
- When computing present value of lease payments, lessees use the lessor’s implicit rate if known; otherwise, an incremental borrowing rate is applicable.
Financial Impact of Leases
- In early lease durations, finance leases can lead to increased reported debt and different income outcomes compared to operating leases.
- Finance leases often result in a higher debt obligation than operating leases.
Depreciation of Leased Assets
- Assets under finance leases with a bargain purchase option are depreciated over the asset's remaining economic life.
Advantages of Leasing
- Benefits of leasing include protection against obsolescence, no initial down payment, and potentially less restrictive provisions compared to traditional debt agreements.
Reasons for Leasing Activity
- Companies may engage in leasing for reasons including interest revenue, high residual values, and tax incentives.
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Description
Test your knowledge on current practices in lease accounting with this Chapter 21 quiz. Explore key concepts, definitions, and theoretical underpinnings pertinent to lease classification. Perfect for students studying accounting principles.
