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20 and 21 Conceptual

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20 and 21 test
buggq
Quiz by buggq, updated more than 1 year ago More Less
eabrown6
Created by eabrown6 about 8 years ago
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Copied by buggq about 8 years ago
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Resource summary

Question 1

Question
A pension plan is contributory when the employer makes payments to a funding agency.
Answer
  • True
  • False

Question 2

Question
Qualified pension plans permit deductibility of the employer’s contributions to the pension fund.
Answer
  • True
  • False

Question 3

Question
An employer does not have to report a liability on its balance sheet in a defined-benefit plan.
Answer
  • True
  • False

Question 4

Question
Employers are at risk with defined-benefit plans because they must contribute enough to meet the cost of benefits that the plan defines.
Answer
  • True
  • False

Question 5

Question
Companies compute the vested benefit obligation using only vested benefits, at current salary levels.
Answer
  • True
  • False

Question 6

Question
The accumulated benefit obligation bases the deferred compensation amount on both vested and nonvested service using future salary levels.
Answer
  • True
  • False

Question 7

Question
Service cost is the expense caused by the increase in the accumulated benefit obligation because of employees’ service during the current year.
Answer
  • True
  • False

Question 8

Question
The interest component of pension expense in the current period is computed by multiplying the settlement rate by the beginning balance of the projected benefit obligation.
Answer
  • True
  • False

Question 9

Question
Companies recognize the accumulated benefit obligation in their accounts and in their financial statements.
Answer
  • True
  • False

Question 10

Question
The Pension Asset / Liability account balance equals the difference between the projected benefit obligation and the fair value of pension plan assets.
Answer
  • True
  • False

Question 11

Question
Companies should recognize the entire increase in projected benefit obligation due to a plan initiation or amendment as pension expense in the year of amendment.
Answer
  • True
  • False

Question 12

Question
The FASB makes it mandatory to use only the years-of-service method for amortization of prior service cost.
Answer
  • True
  • False

Question 13

Question
The difference between the expected return and the actual return is referred to as the unexpected gain or loss.
Answer
  • True
  • False

Question 14

Question
The unexpected gains and losses from changes in the projected benefit obligation are called asset gains and losses.
Answer
  • True
  • False

Question 15

Question
The Accumulated Other Comprehensive Income (G/L) account is amortized only if it exceeds 10 percent of the larger of the beginning balances of the projected benefit obligation or the market-related plan assets value.
Answer
  • True
  • False

Question 16

Question
If the Accumulated Other Comprehensive Income (G/L) account is less than the corridor, the net gains and losses are subject to amortization.
Answer
  • True
  • False

Question 17

Question
When a company amends its defined benefit plan, and recognizes prior service, the projected benefit obligation is increased to recognize this additional liability.
Answer
  • True
  • False

Question 18

Question
Companies report Accumulated Other Comprehensive Income (PSC) as a liability on the balance sheet.
Answer
  • True
  • False

Question 19

Question
Companies must disclose a reconciliation of how the projected benefit obligation and the fair value of plan assets changed during the year either in their financial statements or in the notes.
Answer
  • True
  • False

Question 20

Question
Benefits under a pension plan can include the retiree, the retiree's spouse, and other dependents.
Answer
  • True
  • False

Question 21

Question
In determining the present value of the prospective benefits (often referred to as the projected benefit obligation), which of the following are considered by the actuary?
Answer
  • Retirement and mortality rate.
  • Interest rates.
  • Benefit provisions of the plan.
  • All of these are considered.

Question 22

Question
In a defined-benefit plan, the process of funding refers to
Answer
  • determining the projected benefit obligation.
  • determining the accumulated benefit obligation.
  • making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims.
  • determining the amount that might be reported for pension expense.

Question 23

Question
In all pension plans, the accounting problems include all the following except
Answer
  • measuring the amount of pension obligation.
  • disclosing the status and effects of the plan in the financial statements.
  • allocating the cost of the plan to the proper periods.
  • determining the level of individual premiums.

Question 24

Question
In a defined-contribution plan, a formula is used that
Answer
  • defines the benefits that the employee will receive at the time of retirement.
  • ensures that pension expense and the cash funding amount will be different.
  • requires an employer to contribute a certain sum each period based on the formula.
  • ensures that employers are at risk to make sure funds are available at retirement.

Question 25

Question
In a defined-benefit plan, a formula is used that
Answer
  • requires that the benefit of gain or the risk of loss from the assets contributed to the pension plan be borne by the employee.
  • defines the benefits that the employee will receive at the time of retirement.
  • requires that pension expense and the cash funding amount be the same.
  • defines the contribution the employer is to make; no promise is made concerning the ultimate benefits to be paid out to the employees.

Question 26

Question
Which of the following is not a characteristic of a defined-contribution pension plan?
Answer
  • The employer's contribution each period is based on a formula.
  • The benefits to be received by employees are determined by an employee’s highest compensation level defined by the terms of the plan.
  • The accounting for a defined-contribution plan is straightforward and uncomplicated.
  • The benefit of gain or the risk of loss from the assets contributed to the pension fund is borne by the employee.

Question 27

Question
In accounting for a defined-benefit pension plan
Answer
  • an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised.
  • the employer's responsibility is simply to make a contribution each year based on the formula established in the plan.
  • the expense recognized each period is equal to the cash contribution.
  • the liability is determined based upon known variables that reflect future salary levels promised to employees.

Question 28

Question
Alternative methods exist for the measurement of the pension obligation (liability). Which measure requires the use of future salaries in its computation?
Answer
  • Vested benefit obligation
  • Accumulated benefit obligation
  • Projected benefit obligation
  • Restructured benefit obligation

Question 29

Question
The accumulated benefit obligation measures
Answer
  • the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels.
  • the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels.
  • the level cost that will be sufficient, together with interest to provide the total benefits at retirement.
  • the shortest possible period for funding to maximize the tax deduction.

Question 30

Question
The projected benefit obligation is the measure of pension obligation that
Answer
  • is required to be used for reporting the service cost component of pension expense.
  • requires pension expense to be determined solely on the basis of the plan formula applied to years of service to date and based on existing salary levels.
  • requires the longest possible period for funding to maximize the tax deduction.
  • is not sanctioned under generally accepted accounting principles for reporting the service cost component of pension expense.

Question 31

Question
Differing measures of the pension obligation can be based on
Answer
  • all years of service—both vested and nonvested—using current salary levels.
  • only the vested benefits using current salary levels.
  • both vested and nonvested service using future salaries.
  • All of these answers are correct.

Question 32

Question
Vested benefits
Answer
  • usually require a certain minimum number of years of service.
  • are those that the employee is entitled to receive even if fired.
  • are not contingent upon additional service under the plan.
  • are defined by all of these answers.

Question 33

Question
The relationship between the amount funded and the amount reported for pension expense is as follows:
Answer
  • pension expense must equal the amount funded.
  • pension expense will be less than the amount funded.
  • pension expense will be more than the amount funded.
  • pension expense may be greater than, equal to, or less than the amount funded.

Question 34

Question
The computation of pension expense includes all the following except
Answer
  • service cost component measured using current salary levels.
  • interest on projected benefit obligation.
  • expected return on plan assets.
  • All of these are included in the computation.

Question 35

Question
In computing the service cost component of pension expense, the FASB concluded that
Answer
  • the accumulated benefit obligation provides a more realistic measure of the pension obligation on a going concern basis.
  • a company should employ an actuarial funding method to report pension expense that best reflects the cost of benefits to employees.
  • the projected benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense.
  • All of these answers are correct.

Question 36

Question
The interest on the projected benefit obligation component of pension expense
Answer
  • reflects the incremental borrowing rate of the employer.
  • reflects the rates at which pension benefits could be effectively settled.
  • is the same as the expected return on plan assets.
  • may be stated implicitly or explicitly when reported.

Question 37

Question
One component of pension expense is actual return on plan assets. Plan assets include
Answer
  • assets that a company holds to earn a reasonable return, generally at minimum risk.
  • plan assets still under the control of the company.
  • only assets reported on the balance sheet of the employer as prepaid pension cost.
  • None of these answers are correct.

Question 38

Question
The actual return on plan assets
Answer
  • is equal to the change in the fair value of the plan assets during the year.
  • includes interest, dividends, and changes in the fair value of the fund assets.
  • is equal to the expected rate of return times the fair value of the plan assets at the beginning of the period.
  • All of these answers are correct.

Question 39

Question
In accounting for a pension plan, any difference between the pension cost charged to expense and the payments into the fund should be reported as
Answer
  • an offset to the liability for prior service cost.
  • pension asset/liability.
  • as other comprehensive income (G/L)
  • as accumulated other comprehensive income (PSC).

Question 40

Question
Which of the following items should be included in pension expense calculated by an employer who sponsors a defined-benefit pension plan for its employees? Amortization of Fair value prior of plan assets service cost
Answer
  • Yes Yes
  • Yes No
  • No Yes
  • No No

Question 41

Question
A corporation has a defined-benefit plan. A pension liability will result at the end of the year if the
Answer
  • projected benefit obligation exceeds the fair value of the plan assets.
  • fair value of the plan assets exceeds the projected benefit obligation.
  • amount of employer contributions exceeds the pension expense.
  • amount of pension expense exceeds the amount of employer contributions.

Question 42

Question
When a company adopts a pension plan, prior service costs should be charged to
Answer
  • accumulated other comprehensive income (PSC).
  • operations of prior periods.
  • Other comprehensive income (PSC).
  • retained earnings.

Question 43

Question
When a company amends a pension plan, for accounting purposes, prior service costs should be
Answer
  • treated as a prior period adjustment because no future periods are benefited.
  • amortized in accordance with procedures used for income tax purposes.
  • recorded in other comprehensive income (PSC).
  • reported as an expense in the period the plan is amended.

Question 44

Question
Prior service cost is amortized on a
Answer
  • straight-line basis over the expected future years of service.
  • years-of-service method or on a straight-line basis over the average remaining service life of active employees.
  • straight-line basis over 15 years.
  • straight-line basis over the average remaining service life of active employees or 15 years, whichever is longer.

Question 45

Question
Whenever a defined-benefit plan is amended and credit is given to employees for years of service provided before the date of amendment
Answer
  • both the accumulated benefit obligation and the projected benefit obligation are usually greater than before.
  • both the accumulated benefit obligation and the projected benefit obligation are usually less than before.
  • the expense and the liability should be recognized at the time of the plan change.
  • the expense should be recognized immediately, but the liability may be deferred until a reasonable basis for its determination has been identified.

Question 46

Question
The actuarial gains or losses that result from changes in the projected benefit obligation are called Asset Liability Gains & Losses Gains & Losses
Answer
  • Yes Yes
  • No No
  • Yes No
  • No Yes

Question 47

Question
Gains and losses that relate to the computation of pension expense should be
Answer
  • recorded currently as an adjustment to pension expense in the period incurred.
  • recorded currently and in the future by applying the corridor method which provides the amount to be amortized.
  • amortized over a 15-year period.
  • recorded only if a loss is determined.

Question 48

Question
The fair value of pension plan assets is used to determine the corridor and to calculate the expected return on plan assets. Expected Return Corridor on Plan Assets
Answer
  • Yes Yes
  • Yes No
  • No Yes
  • No No

Question 49

Question
A pension fund gain or loss that is caused by a plant closing should be
Answer
  • recognized immediately as a gain or loss on the plant closing.
  • spread over the current year and future years.
  • charged or credited to the current pension expense.
  • recognized as a prior period adjustment.

Question 50

Question
A pension liability is reported when
Answer
  • the projected benefit obligation exceeds the fair value of pension plan assets.
  • the accumulated benefit obligation is less than the fair value of pension plan assets.
  • the pension expense reported for the period is greater than the funding amount for the same period.
  • accumulated other comprehensive income exceeds the fair value of pension plan assets.

Question 51

Question
A pension asset is reported when
Answer
  • the accumulated benefit obligation exceeds the fair value of pension plan assets.
  • the accumulated benefit obligation exceeds the fair value of pension plan assets, but a prior service cost exists.
  • pension plan assets at fair value exceed the accumulated benefit obligation.
  • pension plan assets at fair value exceed the projected benefit obligation.

Question 52

Question
Which of the following is true of pension termination?
Answer
  • Companies can terminate a pension plan whenever they wish to do so.
  • Terminating a pension plan is illegal in U.S.
  • A company must start a new defined benefit plan after it eliminates the old one.
  • FASB requires recognition in earnings of a gain or loss when a pension obligation is settled.

Question 53

Question
According to the FASB, recognition of a liability is required when the projected benefit obligation exceeds the fair value of plan assets. Conversely, when the fair value of plan assets exceeds the projected benefit obligation, the Board
Answer
  • requires recognition of an asset.
  • requires recognition of an asset if the excess fair value of plan assets exceeds the corridor amount.
  • recommends recognition of an asset but does not require such recognition.
  • does not permit recognition of an asset.

Question 54

Question
Which of the following disclosures of pension plan information would not normally be required?
Answer
  • The major components of pension expense
  • The amount of prior service cost changed or credited in previous years.
  • The funded status of the plan and the amounts recognized in the financial statements
  • The rates used in measuring the benefit amounts

Question 55

Question
The main purpose of the Pension Benefit Guaranty Corporation is to
Answer
  • require minimum funding of pensions.
  • require plan administrators to publish a comprehensive description and summary of their plans.
  • administer terminated plans and to impose liens on the employer's assets for certain unfunded pension liabilities.
  • All of these answers are correct.

Question 56

Question
Which of the following statements is true about postretirement health care benefits?
Answer
  • They are generally funded.
  • The benefits are well-defined and level in dollar amount.
  • The beneficiary is the retiree, spouse, and other dependents.
  • The benefit is payable monthly.

Question 57

Question
Which of the following disclosures of postretirement benefits would not be required by professional pronouncements?
Answer
  • Postretirement expense for the period
  • A schedule showing changes in postretirement benefits and plan assets during the year
  • The amount of the EPBO
  • The assumptions and rates used in computing the EPBO and APBO

Question 58

Question
Which of the following is true of healthcare benefits?
Answer
  • Healthcare benefit plans are generally not funded.
  • Healthcare benefits are payable monthly.
  • Variables in healthcare benefits are generally predictable.
  • The benefits are well-defined in healthcare benefits.

Question 59

Question
A postretirement asset is computed as the excess of the
Answer
  • expected postretirement benefit obligation over the fair value of plan assets.
  • accumulated postretirement benefit obligation over the fair value of plan assets.
  • fair value of plan assets over the accumulated postretirement benefit obligation.
  • accumulated postretirement benefit obligation over the fair value of plan assets, but not vice versa.

Question 60

Question
Gains or losses can represent changes in
Answer
  • EPBO or the fair value of pension plan assets.
  • EPBO or the book value of pension plan assets.
  • APBO or the fair value of pension plan assets.
  • APBO or the book value of pension plan assets.

Question 61

Question
Which of the following statements about the expected postretirement benefit obligation (EPBO) is not correct?
Answer
  • The EPBO is an actuarial present value.
  • The EPBO is recorded in the accounts.
  • The EPBO is used in measuring periodic expense.
  • All of these are correct.

Question 62

Question
Which of the following statements about the recognition of a prior service cost related to a postretirement obligation is correct?
Answer
  • The prior service amount is recognized in the income statement in the current period.
  • The prior service cost is recognized in the income statement net of tax.
  • Restatement of previously issued annual financial statements is required.
  • The prior service cost amount affects comprehensive income in the current period.

Question 63

Question
Which of the following is recognized in the accounts and in the financial statements?
Answer
  • Accumulated postretirement benefit obligation
  • Postretirement asset / liability
  • Expected postretirement benefit obligation
  • All of these answers are correct.

Question 64

Question
Interest cost included in pension expense recognized for a period by an employer sponsoring a defined-benefit pension plan represents the
Answer
  • shortage between the expected and actual returns on plan assets.
  • increase in the projected benefit obligation due to the passage of time.
  • increase in the fair value of plan assets due to the passage of time.
  • amortization of the discount on accumulated OCI (PSC).

Question 65

Question
Seigel Co. maintains a defined-benefit pension plan for its employees. At each balance sheet date, Yeager should report a pension asset / liability equal to the
Answer
  • excess of the accumulated benefit obligation over the fair value of the plan assets.
  • projected benefit obligation.
  • accumulated benefit obligation.
  • funded status relative to the projected benefit obligation.

Question 66

Question
Ohlman, Inc. maintains a defined-benefit pension plan for its employees. As of December 31, 2015, the market value of the plan assets is less than the accumulated benefit obligation. The projected benefit obligation exceeds the accumulated benefit obligation. In its balance sheet as of December 31, 2015, Ohlman should report a liability in the amount of the
Answer
  • excess of the projected benefit obligation over the fair value of the plan assets.
  • excess of the accumulated benefit obligation over the fair value of the plan assets.
  • projected benefit obligation.
  • accumulated benefit obligation.

Question 67

Question
Leasing equipment reduces the risk of obsolescence to the lessee and in many cases passes the risk of residual value to the lessor.
Answer
  • True
  • False

Question 68

Question
The FASB agrees with the capitalization approach and requires companies to capitalize all long-term leases.
Answer
  • True
  • False

Question 69

Question
Minimum rental payments are the same as minimum lease payments.
Answer
  • True
  • False

Question 70

Question
Executory costs should be excluded by the lessee in computing the present value of the minimum lease payments.
Answer
  • True
  • False

Question 71

Question
A capitalized leased asset is always depreciated over the term of the lease by the lessee.
Answer
  • True
  • False

Question 72

Question
A lessee records interest expense in both a capital lease and an operating lease.
Answer
  • True
  • False

Question 73

Question
A benefit of leasing to the lessor is the return of the leased property at the end of the lease term.
Answer
  • True
  • False

Question 74

Question
The distinction between a direct-financing lease and a sales-type lease is the presence or absence of a transfer of title.
Answer
  • True
  • False

Question 75

Question
Lessors classify and account for all leases that don’t qualify as sales-type leases as operating leases.
Answer
  • True
  • False

Question 76

Question
Direct-financing leases are in substance the financing of an asset purchase by the lessee.
Answer
  • True
  • False

Question 77

Question
Under the operating method, the lessor records each rental receipt as part interest revenue and part rental revenue.
Answer
  • True
  • False

Question 78

Question
In computing the annual lease payments, the lessor deducts only a guaranteed residual value from the fair value of a leased asset.
Answer
  • True
  • False

Question 79

Question
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.
Answer
  • True
  • False

Question 80

Question
Both a guaranteed and an unguaranteed residual value affect the lessee’s computation of amounts capitalized as a leased asset.
Answer
  • True
  • False

Question 81

Question
From the lessee’s viewpoint, an unguaranteed residual value is the same as no residual value in terms of computing the minimum lease payments.
Answer
  • True
  • False

Question 82

Question
The lessor will recover a greater net investment if the residual value is guaranteed instead of unguaranteed.
Answer
  • True
  • False

Question 83

Question
The primary difference between a direct-financing lease and a sales-type lease is the manufacturer’s or dealer’s gross profit (or loss).
Answer
  • True
  • False

Question 84

Question
The gross profit amount in a sales-type lease is greater when a guaranteed residual value exists.
Answer
  • True
  • False

Question 85

Question
Companies must periodically review the estimated unguaranteed residual value in a sales-type lease.
Answer
  • True
  • False

Question 86

Question
The FASB requires lessees and lessors to disclose certain information about leases in their financial statements or in the notes.
Answer
  • True
  • False

Question 87

Question
Major reasons why a company may become involved in leasing to other companies is (are)
Answer
  • interest revenue.
  • high residual values.
  • tax incentives.
  • All of these answers are correct.

Question 88

Question
Which of the following is an advantage of captive leasing companies over the other players in the leasing market?
Answer
  • They have access to low-cost funds allowing them to purchase assets at lower cost.
  • They are good at developing innovative contracts that help avoid accounting problems.
  • They provide leasing arrangements for a wider range of products than the parent company’s product line.
  • They have the paint-of-sale advantage in finding leasing customers.

Question 89

Question
Which of the following best describes current practice in accounting for leases?
Answer
  • Leases are not capitalized.
  • Leases similar to installment purchases are capitalized.
  • All long-term leases are capitalized.
  • All leases are capitalized.

Question 90

Question
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 that
Answer
  • all leases are generally for the economic life of the property and the residual value of the property at the end of the lease is minimal.
  • at the end of the lease the property usually can be purchased by the lessee.
  • a lease reflects the purchase or sale of a quantifiable right to the use of property.
  • during the life of the lease the lessee can effectively treat the property as if it were owned.

Question 91

Question
An essential element of a lease is that the
Answer
  • lessor conveys less than his or her total interest in the property.
  • lessee provides a sinking fund equal to one year’s lease payments.
  • property that is the subject of the lease agreement must be held for sale by the lessor prior to the drafting of the lease agreement.
  • term of the lease is substantially equal to the economic life of the leased property.

Question 92

Question
What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee?
Answer
  • There is no impact as the option does not enter into the transaction until the end of the lease term.
  • The lessee must increase the present value of the minimum lease payments by the present value of the option price.
  • The lessee must decrease the present value of the minimum lease payments by the present value of the option price.
  • The minimum lease payments would be increased by the present value of the option price if, at the time of the lease agreement, it appeared certain that the lessee would exercise the option at the end of the lease and purchase the asset at the option price.

Question 93

Question
The amount to be recorded as the cost of an asset under capital lease is equal to the
Answer
  • present value of the minimum lease payments.
  • present value of the minimum lease payments or the fair value of the asset, whichever is lower.
  • present value of the minimum lease payments plus the present value of any unguaranteed residual value.
  • carrying value of the asset on the lessor’s books.

Question 94

Question
The methods of accounting for a lease by the lessee are
Answer
  • operating and capital lease methods.
  • operating, sales, and capital lease methods.
  • operating and leveraged lease methods.
  • None of these answers are correct.

Question 95

Question
Which of the following is a correct statement of one of the capitalization criteria?
Answer
  • The lease transfers ownership of the property to the lessor.
  • The lease contains a purchase option.
  • The lease term is equal to or more than 75% of the estimated economic life of the leased property.
  • The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property.

Question 96

Question
Minimum lease payments may include a
Answer
  • penalty for failure to renew.
  • bargain purchase option.
  • guaranteed residual value.
  • any of these.

Question 97

Question
In computing depreciation of a leased asset, the lessee should subtract
Answer
  • a guaranteed residual value and depreciate over the term of the lease.
  • an unguaranteed residual value and depreciate over the term of the lease.
  • a guaranteed residual value and depreciate over the life of the asset.
  • an unguaranteed residual value and depreciate over the life of the asset.

Question 98

Question
In computing the present value of the minimum lease payments, the lessee should
Answer
  • use its incremental borrowing rate in all cases.
  • use either its incremental borrowing rate or the implicit rate of the lessor, whichever is higher, assuming that the implicit rate is known to the lessee.
  • use 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.
  • None of these answers are correct.

Question 99

Question
In computing the present value of the minimum lease payments, the lessee should
Answer
  • use its incremental borrowing rate in all cases.
  • use either its incremental borrowing rate or the implicit rate of the lessor, whichever is higher, assuming that the implicit rate is known to the lessee.
  • use 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.
  • None of these answers are correct.

Question 100

Question
Lessees prefer to account for their leases as operating lease because:
Answer
  • it increases their debt to total equity ratio.
  • it decreases the income tax expense.
  • it increases the amount of total assets.
  • it decreases the amount of liability reported.

Question 101

Question
From the lessee’s perspective, in the earlier years of a lease, the use of the
Answer
  • capital method will enable the lessee to report higher income, compared to the operating method.
  • capital method will cause debt to increase, compared to the operating method.
  • operating method will cause income to decrease, compared to the capital method.
  • operating method will cause debt to increase, compared to the capital method.

Question 102

Question
A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over the
Answer
  • asset’s remaining economic life.
  • term of the lease.
  • life of the asset or the term of the lease, whichever is shorter.
  • life of the asset or the term of the lease, whichever is longer.

Question 103

Question
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 Contains Bargain Collectibility of Lease Any Important By End Of Lease? Purchase Option? Payments Assured? Uncertainties?
Answer
  • No Yes Yes No
  • Yes No No No
  • Yes No No Yes
  • No Yes Yes Yes

Question 104

Question
Which of the following would not be included in the Lease Receivable account?
Answer
  • Guaranteed residual value
  • Unguaranteed residual value
  • A bargain purchase option
  • All would be included

Question 105

Question
In a lease that is appropriately recorded as a direct-financing lease by the lessor, the unearned income
Answer
  • should be amortized over the period of the lease using the effective interest method.
  • should be amortized over the period of the lease using the straight-line method.
  • does not arise.
  • should be recognized at the lease’s expiration.

Question 106

Question
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 as
Answer
  • the amount of funds the lessor has tied up in the asset which is the subject of the direct-financing lease.
  • the difference between the lease payments receivable and the fair value of the leased property.
  • the present value of minimum lease payments.
  • the total book value of the asset less any accumulated depreciation recorded by the lessor prior to the lease agreement.

Question 107

Question
If the residual value of a leased asset is guaranteed by a third party
Answer
  • it is treated by the lessee as no residual value.
  • the third party is also liable for any lease payments not paid by the lessee.
  • the net investment to be recovered by the lessor is reduced.
  • it is treated by the lessee as an additional payment and by the lessor as realized at the end of the lease term.

Question 108

Question
When lessors account for residual values related to leased assets, they
Answer
  • include the residual value because they always assume the residual value will be realized.
  • include the unguaranteed residual value in sales revenue.
  • recognize more gross profit on a sales-type lease with a guaranteed residual value than on a sales-type lease with an unguaranteed residual value.
  • All of the answers are true with regard to lessors and residual values.

Question 109

Question
The initial direct costs of leasing
Answer
  • are generally borne by the lessee.
  • include incremental costs related to internal activities of leasing, and internal costs related to costs paid to external third parties for originating a lease arrangement.
  • are expensed in the period of the sale under a sales-type lease.
  • All of the answers are true with regard to the initial direct costs of leasing.

Question 110

Question
The primary difference between a direct-financing lease and a sales-type lease is the
Answer
  • manner in which rental receipts are recorded as rental income.
  • amount of the depreciation recorded each year by the lessor.
  • recognition of the manufacturer’s or dealer’s profit at (or loss) the inception of the lease.
  • allocation of initial direct costs by the lessor to periods benefited by the lease arrangements.

Question 111

Question
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?
Answer
  • The minimum lease payments plus the unguaranteed residual value.
  • The present value of the minimum lease payments.
  • The cost of the asset to the lessor, less the present value of any unguaranteed residual value.
  • The present value of the minimum lease payments plus the present value of the unguaranteed residual value.

Question 112

Question
For a sales-type lease,
Answer
  • the sales price includes the present value of the unguaranteed residual value.
  • the present value of the guaranteed residual value is deducted to determine the cost of goods sold.
  • the gross profit will be the same whether the residual value is guaranteed or unguaranteed.
  • None of these answers are correct.

Question 113

Question
Which of the following statements is correct?
Answer
  • For direct-financing leases, initial direct costs are added to the net investment in the lease.
  • For sales-type leases, initial direct costs are expensed in the year of incurrence.
  • For operating leases, initial direct costs are deferred and allocated over the lease term.
  • All of these answers are correct.

Question 114

Question
The Lease Liability account should be disclosed as
Answer
  • all current liabilities.
  • all noncurrent liabilities.
  • current portions in current liabilities and the remainder in noncurrent liabilities.
  • deferred credits.

Question 115

Question
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?
Answer
  • Lessee uses a higher interest rate than that used by lessor.
  • Set the lease term at something less than 75% of the estimated useful life of the property.
  • Write in a bargain purchase option.
  • Use a third party to guarantee the asset’s residual value.

Question 116

Question
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 Party recording asset on its books interest expense
Answer
  • Seller-lessee Purchaser-lessor
  • Purchaser-lessor Seller-lessee
  • Purchaser-lessor Purchaser-lessor
  • Seller-lessee Seller-lessee

Question 117

Question
In a sale-leaseback transaction where none of the four leasing criteria are satisfied, which of the following is false?
Answer
  • The seller-lessee removes the asset from its books.
  • The purchaser-lessor records a gain.
  • The seller-lessee records the lease as an operating lease.
  • All of the answers are false statements.

Question 118

Question
When a company sells property and then leases it back, any gain on the sale should usually be
Answer
  • recognized in the current year.
  • recognized as a prior period adjustment.
  • recognized at the end of the lease.
  • deferred and recognized as income over the term of the lease.
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