Question 1. Under the capital method of accounting for leases th

1. Under the capital method of accounting for leases the excess of aggregate rentals over the cost of
leased property should be recognized as revenue of the lessor
a. In increasing amounts during the term of the lease
b. In constant amounts during the term of the lease
c. In decreasing amounts during the term of the lease
d. After the cost of leased property has been fully recovered through rentals
2. When measuring the present value of future rentals to be capitalized as part of the purchase price
in a lease that is be accounted for as a purchase, identifiable payments to cover taxes, insurance,
and maintenance should be
a. Included in the future rentals to be capitalized
b. Excluded from future rentals to be capitalized
c. Capitalized but at a different discount rate and recorded in a different account than future
rental payments
d. Capitalized but at a different discount rate and for a relevant period that tends to be different
than that for future rental payments
3. Equal monthly rental payments for a particular lease should be charged to rental expense by the
lessee for which of the following?
Capital lease Operating lease
a. Yes No
b. Yes Yes
c. No No
d. No Yes
4. In a lease that is recorded as a sales-type lease by the lessor, the difference between the gross
investment in the lease and sum of the present values of the components of the gross investment
should be recognized as income
a. In full at the lease’s expiration
b. In full at the lease’s inception
c. Over the period of the lease using the interest method of amortization
d. Over the period of the lease using the straight-line method of amortization
5. For a six-year capital lease, the portion of the minimum lease payment in the third year applicable
to the reduction of the obligation should be
a. Less than in the second year
b. More than in the second year
c. The same as in the fourth year
d. More than in the fourth year
6. Based solely upon the following sets of circumstances, indicate below which set gives rise to a
sales type or direct financing lease of a lessor:
Transfers Contains
Ownership bargain
By end of purchase
Lease? Provision?
a. No Yes
b. Yes No
c. Yes Yes
d. No No
7. Generally accepted accounting principles require that certain lease agreements be accounted for
as purchases. The theoretical basis for this treatment is that a lease of this type
a. Effectively conveys all of the benefits and risks incident to the ownership of property
b. Is an example of form over substance
c. Provides the use of the leased asset to the lessee for a limited period of time
d. Must be recorded in accordance with the concept of cause and effect
8. The appropriate valuation of an operating lease on the statement of financial position of a lessee
is
a. Zero
b. The absolute sum of the lease payments
c. The present value of the sum of the lease payments discounted at an appropriate rate
d. The market value of the asset at the date of the inception of the lease
9. A six-year-capital lease entered into on December 31, 2008, specified equal minimum annual
lease payments due on December 31, 2010. Minimum payment applicable to which of the
following increased over the corresponding December 31, 2010, minimum payment?
Reduction of
Interest Expense Liability
a. Yes Yes
b. Yes No
c. No Yes
d. No No
10. Office equipment recorded under a capital lease containing a bargain purchase option should be
amortized
a. Over the period of the lease using the interest method of amortization
b. Over the period of the lease using the straight-line method of amortization
c. In a manner consistent with the lessee’s normal depreciation policy for owned assets
d. In a manner consistent with the lessee’s normal depreciation policy for owned assets except
that the period of amortization should be the lease term
11. What is the primary accounting issue for lessees?
a. Recording interest expense on the lease obligation.
b. Determining whether the lease meets the 90% of fair value test.
c. Off-balance sheet financing.
d. The measurement of the leased asset under a capital lease.
12. What is the primary accounting issue for lessors?
a. Off-balance sheet financing.
b. Revenue recognition and expense allocation over the lease term.
c. Treating the lease in the same manner as the lessee does.
d. Determining whether the lease is a sales-type lease or a direct financing lease.
13. For the lessor to recognize a lease as a sales-type lease, the following must occur.
a. At least one of the capital lease criteria is met, at least one of the certainty criteria is met, and
there is a manufacturer or dealer’s profit.
b. At least one of the capital lease criteria is met, both certainty criteria are met, and there is a
manufacturer or dealer’s profit.
c. More than one of the capital lease criteria are met, both certainty criteria are met, and there is
a manufacturer or dealer’s profit.
d. Only one of the capital lease criteria is met, both certainty criteria are met, and there is a
manufacturer or dealer’s profit.
14. A net operating loss carryover that occurs in a company’s second year of operations
a. May cause a company to report a tax benefit in the current period income statement.
b. Has no effect on income tax expense of the current period because no taxes are paid.
c. Causes a company to report a deferred income tax liability for taxes that are not paid

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