Multiple Choice: Nama: Isdawati Talib NIM: 36119034 Kelas: 2B-D3

Nama : Isdawati Talib
NIM : 36119034
Kelas : 2B-D3
MULTIPLE CHOICE—Conceptual
1. Major reasons why a company may become involved in leasing to other companies
is (are)
a. interest revenue.
b. high residual values.
c. tax incentives.
d. all of these.
2. Which of the following is an advantage of leasing?

a. Off-balance-sheet financing
b. Less costly financing
c. 100% financing at fixed rates
d. All of these
3. Which of the following best describes current practice in accounting for leases?
a. Leases are not capitalized.
b. Leases similar to installment purchases are capitalized.
c. All long-term leases are capitalized.
d. All leases are capitalized.
4. 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
a. 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.
b. at the end of the lease the property usually can be purchased by the lessee.
c. a lease reflects the purchase or sale of a quantifiable right to the use of
property.
d. during the life of the lease the lessee can effectively treat the property as if it
were owned by the lessee.
5. The methods of accounting for a lease by the lessee are

a. operating and capital lease methods.
b. operating, sales, and capital lease methods.
c. operating and leveraged lease methods.
d. none of these.
6. Which of the following is a correct statement of one of the capitalization criteria?
a. The lease transfers ownership of the property to the lessor.
b. The lease contains a purchase option.
c. The lease term is equal to or more than 75% of the estimated economic life
of the leased property.
d. The minimum lease payments (excluding executory costs) equal or exceed 90%
of the fair value of the leased property.
7. Minimum lease payments may include a

a. penalty for failure to renew.
b. bargain purchase option.
c. guaranteed residual value.
d. any of these.
8. Executory costs include

a. maintenance.
b. property taxes.
c. insurance.
d. all of these.
9. In computing the present value of the minimum lease payments, the lessee should
a. use its incremental borrowing rate in all cases.
b. 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.
c. 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.
d. none of these.
10. In computing depreciation of a leased asset, the lessee should subtract

a. a guaranteed residual value and depreciate over the term of the lease.
b. an unguaranteed residual value and depreciate over the term of the lease.
c. a guaranteed residual value and depreciate over the life of the asset.
d. an unguaranteed residual value and depreciate over the life of the asset.
11. In the earlier years of a lease, from the lessee's perspective, the use of the
a. capital method will enable the lessee to report higher income, compared to the
operating method.
b. capital method will cause debt to increase, compared to the operating
method.
c. operating method will cause income to decrease, compared to the capital
method.
d. operating method will cause debt to increase, compared to the capital method.
12. 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?
a. No Yes Yes No
b. Yes No No No
c. Yes No No Yes
d. No Yes Yes Yes
13. Which of the following would not be included in the Lease Receivable account?
a. Guaranteed residual value
b. Unguaranteed residual value
c. A bargain purchase option
d. All would be included
14. In a lease that is appropriately recorded as a direct financing lease by the lessor,
unearned income
a. should be amortized over the period of the lease using the interest method.
b. should be amortized over the period of the lease using the straight-line method.
c. does not arise.
d. should be recognized at the lease's expiration.
15. For a sales-type lease,

a. the sales price includes the present value of the unguaranteed residual value.
b. the present value of the guaranteed residual value is deducted to determine the
cost of goods sold.
c. the gross profit will be the same whether the residual value is guaranteed
or unguaranteed.
d. none of these.
16. Which of the following statements is correct?

a. In a direct financing lease, initial direct costs are added to the net investment in
the lease.
b. In a sales-type lease, initial direct costs are expensed in the year of incurrence.
c. For operating leases, initial direct costs are deferred and allocated over the lease
term.
d. All of these.
17. The Lease Liability account should be disclosed as

a. all current liabilities.
b. all noncurrent liabilities.
c. current portions in current liabilities and the remainders in noncurrent
liabilities.
d. deferred credits.
*18. When a company sells property and then leases it back, any gain on the sale should
usually be
a. recognized in the current year.
b. recognized as a prior period adjustment.
c. recognized at the end of the lease.
d. deferred and recognized as income over the term of the lease.
Ex. 21-57—Operating lease.

Watts Co. purchased a machine on January 1, 2004, for $3,000,000 for the express purpose
of leasing it. The machine is expected to have a six-year life, no salvage value, and be
depreciated on a straight-line monthly basis. On April 1, 2004, under a cancelable lease,
Watts leased the machine to Easton Company for $900,000 a year for a four-year period
ending March 31, 2008. Watts incurred total maintenance and other related costs under the
provisions of the lease of $50,000 relating to the year ended December 31, 2004. Easton
paid $900,000 to Watts on April 1, 2004.
Instructions [Assume the operating method is appropriate for parts (a) and (b).]
(a) Under the operating method, what should be the income before income taxes derived
by Watts Co. from this lease for the year ended December 31, 2004?
(b) What should be the amount of rent expense incurred by Easton from this lease for the
year ended December 31, 2004?
Answer
a) Revenue 4/1/04—12/31/04 ($900,000 × 9/12) $675,000

Expenses:
Depreciation ($500,000 × 9/12) $375,000
Maintenance, etc. 50,000 425,000
Income before taxes $250,000
b) Rent expense, 4/1/04—12/31/04 ($900,000 × 9/12) = $675,000

Multiple Choice: Nama: Isdawati Talib NIM: 36119034 Kelas: 2B-D3

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Nama : Isdawati Talib

2. Which of the following is an advantage of leasing?

5. The methods of accounting for a lease by the lessee are

7. Minimum lease payments may include a

8. Executory costs include

10. In computing depreciation of a leased asset, the lessee should subtract

15. For a sales-type lease,

16. Which of the following statements is correct?

17. The Lease Liability account should be disclosed as

Ex. 21-57—Operating lease.

a) Revenue 4/1/04—12/31/04 ($900,000 × 9/12) $675,000

b) Rent expense, 4/1/04—12/31/04 ($900,000 × 9/12) = $675,000

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