Lease Classification Tests
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Questions and Answers

Does the lease transfer ownership of the underlying asset to the lessee by the end of the lease term?

  • Transfer of Ownership Test (correct)
  • Lease Term Test
  • Present Value Test
  • Purchase Option Test
  • Does the lease grant the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise?

  • Transfer of Ownership Test
  • Purchase Option Test (correct)
  • Present Value Test
  • Lease Term Test
  • Is the lease term for a major part of the remaining economic life of the underlying asset?

  • Lease Term Test (correct)
  • Transfer of Ownership Test
  • Present Value Test
  • Purchase Option Test
  • 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?

    <p>Present Value Test</p> Signup and view all the answers

    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?

    <p>Alternative Use Test</p> Signup and view all the answers

    How do you record Retained Earnings when changing from percentage-of-completion to completed-contract method?

    <p>debit Retained Earnings the difference</p> Signup and view all the answers

    How do you record Retained Earnings when changing from completed-contract to percentage-of-completion method?

    <p>credit Retained Earnings</p> Signup and view all the answers

    What is the term for paying at the beginning of the year?

    <p>annuity due</p> Signup and view all the answers

    What is the term for paying at the end of the year?

    <p>ordinary annuity</p> Signup and view all the answers

    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.

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