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- December 15, 2024
Question 21
Which Test is Not Used for Lease Classification?
A) Purchase Option Test
B) Alternative Use Test
C) Transfer of Ownership Test
D) Present Value of Payments Test
Answer: D) Present Value of Payments Test
Explanation:
The Present Value of Payments Test is not a recognized lease classification test. Instead,
the Present Value Test assesses if the lease payments represent 90% or more of the
asset’s fair value
Question 22
What Happens When a Lessor Increases the Residual Value of a Lease?
A) The lease liability is reduced
B) The lessor’s receivable increases
C) The lessee’s right-of-use asset decreases
D) The unguaranteed residual value is excluded from the receivable
Answer: B) The lessor's receivable increases
Explanation:
If the residual value increases, the lessor's receivable increases because the total
payments include the future value of the leased asset.
Question 23
In a Finance Lease, How Should the Lessee Record the Accrual of Interest Expense?
A) Debit Lease Liability, Credit Interest Expense
B) Debit Interest Expense, Credit Lease Liability
C) Debit Lease Liability, Credit Cash
D) Debit Right-of-Use Asset, Credit Interest Expense
Answer: B) Debit Interest Expense, Credit Lease Liability
Explanation:
The lessee accrues interest expense in a finance lease by debiting Interest Expense and
crediting Lease Liability.
Question 24
What is the Right-of-Use Asset Depreciation Method in an Operating Lease?
A) Double-declining method
B) Units of production method
C) No depreciation is recorded for operating leases
D) Straight-line method over the lease term
Answer: C) No depreciation is recorded for operating leases
Explanation:
In an operating lease, the lessee does not record depreciation for the right-of-use asset.
Instead, lease expense is recorded on a straight-line basis.
Question 25
What Happens if a Lessee’s Lease Payments Include a Variable Payment?
A) The lease liability increases by the amount of the variable payment
B) The variable payment is excluded from the lease liability
C) The variable payment reduces the right-of-use asset
D) The variable payment is recorded as lease revenue
Answer: B) The variable payment is excluded from the lease liability
Explanation:
Variable lease payments are typically excluded from the lease liability and recognized as
lease expense when incurred.
Question 26
A lessor leases a piece of equipment to a lessee, under lease terms that qualify as an
operating lease. The lease terms call for total cash rental payments over the life of the lease
of $200,000. The present value of those rental payments is $160,000. The estimated
residual value of the leased asset is $20,000. The present value of the residual is $16,000.
Which amount of lease receivable, if any, should the lessor record?
A) $160,000
B) $200,000
C) $16,000
D) $0
Answer: D) $0
Explanation:
Under an operating lease, the lessor does not recognize a lease receivable, as they retain
the underlying asset and recognize rental income as it is earned
Question 27
For a lessee with a finance lease containing a bargain purchase option, what is the lease
asset depreciated over?
A) The lease term
B) The asset’s remaining economic life
C) The lease payment period
D) The shorter of the asset’s life or lease term
Answer: B) The asset's remaining economic life
Explanation:
In cases where a finance lease contains a bargain purchase option, the lessee should
depreciate the asset over its economic life, as the lessee expects to take ownership of the
asset
Question 28
Metcalf Company leases a machine from Vollmer Corp. under an agreement that meets
the criteria to be a finance lease for Metcalf. The six-year lease requires payment of
$170,000 at the beginning of each year, including $25,000 per year for maintenance,
insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessor’s
implicit rate is 8% and is known by the lessee. The present value of an annuity due of
$170,000 for six years at 8% is $848,761. The present value of an annuity due of $170,000
for six years at 10% is $814,435. The present value of an annuity due of $145,000 for six
years at 8% is $723,943. The present value of an annuity due of $145,000 for six years at
10% is $694,664. At which value should Metcalf record the leased asset?
A) $848,761
B) $814,435
C) $723,943
D) $694,664
Answer: C) $723,943
Explanation:
Metcalf should record the leased asset at the present value of the lease payments
(excluding the non-lease components) at the lessor’s implicit rate of 8%, which
corresponds to $723,943.
Question 29
Company A leases cars from Company B for their salespeople. The leases are for three
years. Company A paid a commission to a third party for helping to negotiate the leases
from Company B. How should Company A account for this commission?
A) Expense the commission immediately
B) Exclude it from the lease liability
C) Include the commission in the amount for the right-of-use asset but not in the
lease liability
D) Recognize the commission as deferred revenue
Answer: C) Include the commission in the amount for the right-of-use asset but not in
the lease liability
Explanation:
Commissions paid for negotiating leases are included in the right-of-use asset and are
amortized over the lease term.
Question 30
Company A leases computers from Company B with annual payments of $6,469. The
leases are for two years, and the computers have an economic life of three years. At the end
of the lease, the computers are expected to have a residual value of $5,000. Company A has
an option to purchase the computers for $2,000 at the end of the lease agreement, which it
expects to do. The fair value of the lease is $15,000, and the present value of the lease is
$12,689. The present value of the option to purchase the computers is $1,849. How should
Company A account for the amortization of the computers due to the bargain purchase
option?
A) It should amortize $14,538 using the economic life of the computers
B) It should amortize $15,000 using the lease term
C) It should amortize $12,689 using the lease term
D) It should expense the computers immediately
Answer: A) It should amortize $14,538 using the economic life of the computers
Explanation:
The right-of-use asset, including the purchase option, is amortized over the economic life
of the asset when there is a bargain purchase option, resulting in $14,538 ($12,689 +
$1,849).
Question 31
Which two finance lease elements are a part of each lease payment?
A) Interest expense and depreciation expense
B) Amortization expense and interest expense
C) Lease liability and right-of-use asset
D) A reduction of the lease liability and the financing cost (interest expense)
Answer: D) A reduction of the lease liability and the financing cost (interest expense)
Explanation:
Each finance lease payment reduces the lease liability and includes interest expense as
the financing cost.
Question 32
Does the lessor recognize a lease receivable under an operating lease?
A) Yes
B) No
Answer: B) No
Explanation:
Under an operating lease, the lessor does not recognize a lease receivable because the
asset remains on the lessor’s balance sheet.
Question 33
When should guaranteed residual value be ignored?
A) When the lease term is less than one year
B) When the present value of payments is higher than the guaranteed residual
C) When the estimated fair value at the end of the lease is greater than the
guaranteed residual value
D) When the lease is classified as an operating lease
Answer: C) When the estimated fair value at the end of the lease is greater than the
guaranteed residual value
Explanation:
The guaranteed residual value is ignored if the fair value of the asset at the end of the
lease is greater than the guaranteed amount.
Question 34
The general requirement for changes in accounting principle is what?
A) Retrospective application
B) Prospective application
C) Adjust the current year only
D) No adjustment needed
Answer: A) Retrospective application
Explanation:
Changes in accounting principles require retrospective application, meaning the company
must restate prior period financial statements to reflect the change.
Question 35
Companies report changes in estimates how?
A) Retrospectively
B) Prospectively
C) Adjust all prior periods
D) Record as an irregular item
Answer: B) Prospectively
Explanation:
Changes in accounting estimates are accounted for prospectively, meaning they affect the
current and future periods but do not require changes to prior period financial statements.
Question 36
On December 31, 2020, Paiva Inc. appropriately changed its inventory valuation method
to weighted-average cost from FIFO cost for financial statement purposes. The change will
result in a decrease in the inventory account at January 1, 2020. The amount of the change,
net of tax is, $1,480,000 (all tax effects should be ignored). Where should the cumulative
effect of this accounting change be reported by Paiva Inc. in 2020?
A) On the income statement as an extraordinary item
B) As a footnote to the financial statements
C) Retained earnings statement as a $1,480,000 deduction from the beginning
balance
D) As a prior period adjustment on the balance sheet
Answer: C) Retained earnings statement as a $1,480,000 deduction from the beginning
balance
Explanation:
The cumulative effect of the change in accounting principle is reflected as an adjustment
to the beginning retained earnings balance for the earliest period presented.
Question 37
Which disclosure is required for a change from sum-of-the-years-digits to straight-line
depreciation method?
A) Restate prior financial statements
B) Recompute depreciation for future periods only
C) Recomputation of current and future years’ depreciation
D) Disclose only in the footnotes
Answer: C) Recomputation of current and future years' depreciation
Explanation:
The FASB requires that the change be disclosed and recomputed for both current and
future years’ depreciation.
Question 38
Which approach does the FASB require when accounting for changes in accounting
principle?
A) Prospective
B) Retrospective
C) Cumulative adjustment in the current year
D) No adjustment required
Answer: B) Retrospective
Explanation:
The FASB generally requires retrospective application for changes in accounting
principle unless impracticable.
Question 39
Correction of errors should be treated as prior period adjustments and recorded when?
A) In the year the error is discovered
B) At the beginning of the next fiscal year
C) In the first available financial statement
D) After adjusting all future periods
Answer: A) In the year the error is discovered
Explanation:
When an error is discovered, it should be corrected in the year it is found, typically by
restating the prior period financial statements.
Question 40
A company should restate prior statements affected by errors when?
A) When presenting comparative statements
B) Only if errors are material
C) At the end of the current fiscal year
D) Only in the footnotes
Answer: A) When presenting comparative statements
Explanation:
If prior period financial statements contain errors, they should be restated when
presenting comparative statements to show the correct amounts.
