Reading 39: Long-Term Liabilities and Leases LOSg习题精选 criteria, following, statements, 2010

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LOS g: Determine the effects of finance and operating leases on the financial statements and ratios of the lessees and lessors.

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) lease contains a bargain purchase option.

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

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

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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.

 

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

C) A bargain purchase option exists.

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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.

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

B) Income statement and balance sheet only.

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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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 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.

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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.

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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) 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.

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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 return on assets.

B) lower debt-to-equity ratio.

C) higher 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 about the impact of leases on the financial statements of the lessee is least accurate?

A) Cash flow from investing is higher for a finance lease than an operating lease.

B) Net income is lower in the early years of a finance lease than an operating lease.

C) A finance lease results in higher liabilities compared to an operating lease.

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Cash flow from investing is not affected by a lease being either a finance or an operating lease. Finance leases reduce cash flow from operations by only the portion of the lease payment attributed to interest expense. Cash flow from financing is reduced by the rest of the finance lease payment which is the principal part of the payment.

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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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For a given lease payment and term, which of the following is least accurate regarding the effects of the classification of the lease as a finance lease as compared to an operating lease?

A) The lessee's asset turnover will be lower for a finance lease.

B) The lessee's current ratio will be higher for a finance lease.

C) The lessee's debt-to-equity ratio will be higher for a finance lease.

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The lessee's current ratio will be lower because the current portion of the finance lease increases current liabilities, hence reducing the current ratio.