Reading 39: Non-current (Long-term) Liabilities-LOS h 习题精选 center, initial, finance, subsequent, 2011

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Session 9: Financial Reporting and Analysis: Inventories, Long-lived Assets, Income Taxes, and Non-current Liabilities
Reading 39: Non-current (Long-term) Liabilities

LOS h: Determine the initial recognition and measurement and subsequent measurement of finance leases.

 

 

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

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

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

C) equal the total of the minimum lease payments.

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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.

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Which of the following statements regarding a direct financing lease is least accurate?

A) The principal portion of the lease payment is a cash inflow from investing on the lessor's cash flow statement.

B) The lessor recognizes no gross profit at the inception of the lease.

C) Interest revenue on the lessor's income statement equals the implicit interest rate times the lease payment.

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Interest revenues are calculated by multiplying the implicit interest rate by net receivables at the beginning of the period.

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Compared to an operating lease, a lessee using a finance lease is least likely to have:

A) higher cash flow from financing during the lease period.

B) a lower current ratio.

C) lower net income in the earlier years of the lease.

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Since a portion of the lease payment is treated as repayment of principal under a finance lease, cash flow from financing will be lower.

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In a direct-financing lease, the implicit rate is such that the present value of the minimum lease payments:

A) equals the cost of the leased asset.

B) equals the sale price of the leased asset.

C) is lower than the cost of the leased asset.

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In a direct-financing lease, the implicit rate is such that the present value of the MLPs equals the cost of the leased asset. Thus, at lease inception the total assets do not change and no gain is recognized.

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

C) 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.

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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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If a lessee enters into a finance lease rather than an operating lease, it can expect to have a:

A) higher debt-to-equity ratio.

B) higher return on assets.

C) lower debt-to-equity ratio.

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Leasing the asset with an operating lease avoids recognition of the debt on the lessee’s balance sheet. Having fewer assets and liabilities on the balance sheet than would exist if the assets were purchased increases profitability ratios (e.g., return on assets) and decreases leverage ratios (e.g., debt-to-equity ratio). In the case of a finance lease, the assets are reported on the balance sheet and are depreciated.

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Which of the following statements regarding the effect of a finance lease on the lessee's statement of cash flows is least accurate?

A) The change in the finance lease liability on the balance sheet is a cash flow from financing.

B) The interest expense portion of the lease payments reduces cash flow from operations.

C) The rental expense serves to reduce the cash flow for financing because it is an investment expense.

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In finance leases, there is only interest expense and principal repayment. Rental expense is only charged when the lease is an operating lease.

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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.

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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).

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On the lessee's cash flow statement, the principal portion of a finance lease payment is a:

A) financing cash flow.

B) operating cash flow.

C) investing cash flow.

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The principal portion of a finance lease payment is a financing cash outflow for the lessee. The interest portion is an operating cash outflow.

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If a lease is treated as a finance lease, as compared to being treated as an operating lease, the effect on the lessee's current ratio and the debt/equity ratio will be an:

Current Ratio

Debt/Equity Ratio

A) Decrease Increase

B) Increase Increase

C) Increase Decrease

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With finance leases the lessee's assets, current liabilities, and long-term liabilities will be greater than if the lease was an operating lease. With the debt to equity ratio, the liability is in the numerator, which results in an increase in the ratio. With the current ratio, current liabilities are increased and are in the denominator which results in a decrease in the ratio.