Reading 38: Long-Term Liabilities and Leases - LOS h ～ Q1-6 following, about, black, leasing, statements

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Q1. Which of the following statements about leasing is least accurate?

A)   If the lessor is only financing the purchase of an asset, the lease is considered to be a direct financing lease and gross profits are recognized at the inception of the lease.

B)   Firms that capitalize their leases will have lower current ratios and higher debt to equity ratios than firms that structure their leases as operating leases.

C)   The interest rate implicit in a lease is the discount rate that the lessor used to determine the lease payments.

Q2. Opal Company manufactures sophisticated machines and then leases them to its customers. If the leases are structured in such a way that they are treated as finance leases for accounting purposes, which of the following is least likely to be higher than it would be if Opal treated the leases as operating leases?

A)   net cash flow.

B)   sales.

C)   the total asset turnover ratio.

Q3. In a sales-type lease, a lessor recognizes a gross profit at the inception of the lease equaling the:

A)   sale price of the leased asset plus the present value of the minimum lease payments.

B)   sale price of the leased asset less the present value of the minimum lease payments.

C)   present value of the minimum lease payments less the cost of the leased asset.

Q4. In a direct-financing lease, the implicit rate is such that the present value of the minimum lease payments:

A)   equals the sale price of the leased asset.

B)   equals the cost of the leased asset.

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

Q5. Which of the following statements regarding a direct financing lease is least accurate?

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

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

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

Q6. For a lessor, assuming all other factors are constant, a sales-type lease will result in higher:

A)   cash flow from investing (CFI) as compared to a direct financing lease.

B)   interest revenue as compared to a direct financing lease.

C)   cash flow from operations (CFO) as compared to a direct financing lease.

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