Questions and Answers
Does the lease transfer ownership of the underlying asset to the lessee by the end of the lease term?
Does the lease grant the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise?
Is the lease term for a major part of the remaining economic life of the underlying asset?
Does the present value of the sum of (1) the lease payments and (2) any lessee residual value guarantee not reflected in the lease payments equal or exceed substantially all of the underlying asset's fair value?
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Is the underlying asset of such specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term?
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How do you record Retained Earnings when changing from percentage-of-completion to completed-contract method?
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How do you record Retained Earnings when changing from completed-contract to percentage-of-completion method?
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What is the term for paying at the beginning of the year?
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What is the term for paying at the end of the year?
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Study Notes
Lease Classification Tests
- Transfer of Ownership Test: Determines if the lease transfers ownership of the asset to the lessee by the lease term's end.
- Purchase Option Test: Evaluates if the lessee has a purchase option that is likely to be exercised.
- Lease Term Test: Assesses if the lease duration covers a significant portion of the asset's remaining economic life.
- Present Value Test: Analyzes if the present value of lease payments and any unreflected residual value equals or exceeds most of the asset's fair value.
- Alternative Use Test: Checks if the asset is specialized with no alternative use for the lessor post-lease.
Retained Earnings Adjustments
- Changing to Completed-Contract Method: Adjust Retained Earnings by debiting the difference for accuracy when switching from percentage-of-completion.
- Changing to Percentage-of-Completion Method: Increase Retained Earnings by crediting the difference when transitioning from completed-contract.
Annuity Types
- Annuity Due: Payments made at the beginning of each period.
- Ordinary Annuity: Payments made at the end of each period.
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Description
Test your knowledge on lease classification with these flashcards. This quiz covers essential concepts like ownership transfer and purchase options under lease agreements. Perfect for finance and accounting students.
