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Reading 38: Long-Term Liabilities and Leases - LOS g ~ Q1-6

Q1. Which of the following is least likely one of the criteria under U.S. GAAP for classifying a lease as a finance lease? The:

A)   lessor retains ownership of the property at the end of the lease term.

B)   lease contains a bargain purchase option.

C)   term of the lease is 75% or more of the estimated economic life of the leased property.

Q2. Which of the following statements that classify a lease as a finance lease under U.S. GAAP is least accurate?

A)   Title is transferred at the end of the lease period.

B)   A bargain purchase option exists.

C)   The present value of the lease payments is at least 80% of the fair market value of the asset.

Q3. The Mader Corporation leases an asset for five years with lease payments of $10,000 per year. If Mader classifies the lease as a finance lease, which financial statements are affected at the end of the first year?

A)   Income statement and balance sheet only.

B)   Statement of cash flows, income statement, and balance sheet.

C)   Income statement only.

Q4. For a finance lease, the amount recorded initially by the lessee as a liability will:

A)   be less than the total of the minimum lease payments.

B)   equal the present value of the minimum lease payments at the beginning of the lease.

C)   equal the total of the minimum lease payments.

Q5. Which of the following statements regarding finance and operating leases is least accurate?

A)   During the life of an operating lease, the rent expense equals the lease payment.

B)   For financial reporting of finance and operating leases, no entry is required on the lessee's balance sheet at the inception of the lease.

C)   Asset turnover is higher for the lessee with an operating lease than a finance lease.

Q6. Which of the following statements about leases is least accurate?

A)   In the first years of a finance lease, the lessee's debt to equity ratio is greater than it would have been if the firm had used an operating lease.

B)   In the first years of a finance lease, the lessee's current ratio is greater than it would have been had the firm used an operating lease.

C)   All else equal, when a lease is capitalized the lessee's income will rise over the term of the lease.

答案和详解如下:

Q1. Which of the following is least likely one of the criteria under U.S. GAAP for classifying a lease as a finance lease? The:

A)   lessor retains ownership of the property at the end of the lease term.

B)   lease contains a bargain purchase option.

C)   term of the lease is 75% or more of the estimated economic life of the leased property.

Correct answer is A)

If the lease transfers ownership of the property to the lessee at the end of the lease term, the lessee will classify the lease as a finance lease.

Q2. Which of the following statements that classify a lease as a finance lease under U.S. GAAP is least accurate?

A)   Title is transferred at the end of the lease period.

B)   A bargain purchase option exists.

C)   The present value of the lease payments is at least 80% of the fair market value of the asset.

Correct answer is C)

For a lease to be classified as a finance (capital) lease the present value of the lease payments must be at least 90% of the fair market value of the asset.

Q3. The Mader Corporation leases an asset for five years with lease payments of $10,000 per year. If Mader classifies the lease as a finance lease, which financial statements are affected at the end of the first year?

A)   Income statement and balance sheet only.

B)   Statement of cash flows, income statement, and balance sheet.

C)   Income statement only.

Correct answer is B)

The classification of a lease as a finance lease creates an asset, a debt obligation, financing cash flows (amortization of the loan), and operating cash flows (interest expense).

Q4. For a finance lease, the amount recorded initially by the lessee as a liability will:

A)   be less than the total of the minimum lease payments.

B)   equal the present value of the minimum lease payments at the beginning of the lease.

C)   equal the total of the minimum lease payments.

Correct answer is B)

With a finance lease, both an asset and liability are reported on the lessee's balance sheet, with lease payments divided between interest and principal components. The future payments on principal and interest must be discounted to present value at the beginning of the lease.

Q5. Which of the following statements regarding finance and operating leases is least accurate?

A)   During the life of an operating lease, the rent expense equals the lease payment.

B)   For financial reporting of finance and operating leases, no entry is required on the lessee's balance sheet at the inception of the lease.

C)   Asset turnover is higher for the lessee with an operating lease than a finance lease.

Correct answer is B)

If the lease is an operating lease there is no entry made on the balance sheet for the lessee. For finance leases, the leased asset and liability are recognized on the balance sheet by the amount equal to the present value of the minimum lease payments using as the discount rate the lower of the lessor's implicit rate or the lessee's incremental borrowing rate.

Q6. Which of the following statements about leases is least accurate?

A)   In the first years of a finance lease, the lessee's debt to equity ratio is greater than it would have been if the firm had used an operating lease.

B)   In the first years of a finance lease, the lessee's current ratio is greater than it would have been had the firm used an operating lease.

C)   All else equal, when a lease is capitalized the lessee's income will rise over the term of the lease.

Correct answer is B)

From the lessee's perspective, if a lease is considered to be a finance lease instead of an operating lease, then the lessee's current liabilities will be greater until the lease has expired. This will result in a lower current ratio (larger denominator).

In the early years, the capitalized lease expense (interest plus depreciation) is greater than in the later years because interest expense decreases over time. Less expenses = more income.

In the first years of a finance lease the lessee's debt to equity ratio will be greater than if the firm had used an operating lease because in the case of the finance lease, the numerator is comprised of (debt + lease), while the numerator in the case of the operating lease is (debt) only. In addition, the greater capitalized lease expense flows through to decrease shareholder's equity (the denominator).

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