-
web.groovymark@gmail.com
- December 15, 2024
Question 01
What Is a Finance Lease?
A) A lease where the lessee gains ownership of the asset at the end of the lease
term
B) A lease that transfers control of the underlying asset to the lessee
C) A lease that is less than 12 months long
D) A lease where the lessor remains responsible for maintenance
Answer: B) A lease that transfers control of the underlying asset to the lessee
Explanation:
A Finance Lease transfers control (ownership) of the underlying asset to the lessee, and
the lessee recognizes interest expense on the lease liability and amortization of the rightof-use asset
Question 02
What is the Effective Interest Method?
A) A method used to calculate amortization of a loan
B) A method used to calculate interest expense on a lease liability over time
C) A method to calculate cash inflows from operating activities
D) A method used to calculate depreciation expense
Answer: B) A method used to calculate interest expense on a lease liability over time
Explanation:
The Effective Interest Method is used to calculate the interest expense on the lease
liability, spreading the cost over the life of the lease in a way that reflects the cost of
borrowing.
Question 03
What is a Purchase Option Test?
A) A test that determines if a lessee has the right to purchase the asset at any
time
B) A test to see if the lessee has a purchase option at the end of the lease for a
price significantly below market value
C) A test that verifies the ability of a lessee to pay for an asset
D) A test that measures the economic life of the leased asset
Answer: B) A test to see if the lessee has a purchase option at the end of the lease for a
price significantly below market value
Explanation:
The Purchase Option Test helps determine if a lease qualifies as a finance lease by
evaluating if the lessee can purchase the asset at a bargain price.
Question 04
What is a Bargain Purchase Option?
A) An option allowing the lessee to purchase the leased asset for a price lower
than its fair market value
B) A contractual right to purchase the asset at a set price during the lease term
C) An option for the lessor to reclaim the asset at a lower value
D) A clause that terminates the lease if payments are missed
Answer: A) An option allowing the lessee to purchase the leased asset for a price lower
than its fair market value
Explanation:
A Bargain Purchase Option (BPO) allows the lessee to purchase the leased asset for a
significantly lower price than its market value, typically at the end of the lease.
Question 05
What is a Lease Term Test?
A) A test to determine whether a lease term is for a significant portion of the
asset’s economic life
B) A test to evaluate the interest rate applicable to the lease
C) A test to calculate the residual value of the leased asset
D) A test to determine if the asset’s value will increase during the lease
Answer: A) A test to determine whether a lease term is for a significant portion of the
asset's economic life
Explanation:
The Lease Term Test determines if the lease term represents a major part (usually 75% or
more) of the asset's economic life, classifying the lease as a finance lease.
Question 06
What are Fixed Payments in a Lease?
A) Payments that vary based on the performance of the asset
B) Payments that remain constant throughout the lease term
C) Payments that increase over time
D) Payments based on market conditions
Answer: B) Payments that remain constant throughout the lease term
Explanation:
Fixed Payments in a lease are the agreed-upon payments that remain the same throughout
the duration of the lease, providing stability in lease costs.
Question 07
What is an Incremental Borrowing Rate?
A) The rate charged by banks for personal loans
B) The interest rate a lessee would have to pay to borrow funds to buy the leased
asset
C) The rate a lessor charges to the lessee for renting the asset
D) The average market interest rate for a lease agreement
Answer: B) The interest rate a lessee would have to pay to borrow funds to buy the
leased asset
Explanation:
The Incremental Borrowing Rate is the rate of interest that a lessee would have to pay if
they borrowed funds to purchase the asset, used when the implicit interest rate in the
lease is unknown.
Question 08
What is a Sales-Type Lease?
A) A lease where the lessor retains control of the asset
B) A lease that involves the lessor effectively selling the asset to the lessee
C) A lease where the lessee rents the asset for a short period
D) A lease that only applies to real estate transactions
Answer: B) A lease that involves the lessor effectively selling the asset to the lessee
Explanation:
A Sales-Type Lease is a finance lease where the lessor transfers control of the asset to the
lessee and records the transaction as a sale, recognizing any gain or loss.
Question 09
What is an Operating Lease?
A) A lease that transfers ownership to the lessee
B) A lease where the lessee uses the asset but does not obtain ownership
C) A lease that allows the lessee to purchase the asset at the end of the lease
D) A lease that only lasts for less than a year
Answer: B) A lease where the lessee uses the asset but does not obtain ownership
Explanation:
An Operating Lease allows the lessee to use the asset for a specified period without
transferring ownership. The lessor retains ownership and continues to report the asset on
their balance sheet.
Question 10
How Should a Lessee Account for Lease Payments with a Guaranteed Residual Value?
A) Exclude the residual value when measuring lease liability
B) Include the residual value when measuring lease liability if it is expected to
be less than the guaranteed amount
C) Include the residual value when measuring lease liability regardless of its
expected amount
D) Exclude the residual value in all cases
Answer: B) Include the residual value when measuring lease liability if it is expected to
be less than the guaranteed amount
Explanation:
A lessee includes the guaranteed residual value in the lease liability calculation if the
asset's expected value at the end of the lease is less than the guaranteed amount.
Question 11
What Is the Right-of-Use Asset?
A) An intangible asset recorded by the lessee when signing a lease
B) The asset the lessor retains after the lease term
C) The asset representing the lessee’s right to use the leased property during the
lease term
D) The asset that transfers to the lessee when the lease ends
Answer: C) The asset representing the lessee’s right to use the leased property during the
lease term
Explanation:
The Right-of-Use Asset is recorded by the lessee, representing their right to use the
underlying asset over the lease term, and is amortized during the lease period.
Question 12
What is the Journal Entry for a Lessee’s Initial Operating Lease Payment?
A) Debit Right-of-Use Asset, Credit Lease Liability
B) Debit Lease Liability, Credit Cash
C) Debit Cash, Credit Lease Liability
D) Debit Right-of-Use Asset, Credit Cash
Answer: B) Debit Lease Liability, Credit Cash
Explanation:
In an operating lease, the lessee records the initial payment by debiting the lease liability
and crediting cash for the amount of the payment.
Question 13
What is the Lease Receivable?
A) The amount a lessor expects to receive from selling the leased asset
B) The amount the lessor expects to receive from lease payments and residual
value
C) The total revenue the lessor earns from the lease
D) The value of the leased asset recorded by the lessee
Answer: B) The amount the lessor expects to receive from lease payments and residual
value
Explanation:
The Lease Receivable is recorded by the lessor and includes the present value of future
lease payments and the present value of any guaranteed or unguaranteed residual value.
Question 14
How is a Guaranteed Residual Value Measured by the Lessor?
A) Excluded from the lease receivable
B) Included in the lease receivable calculation
C) Considered only if the lessee defaults on payments
D) Adjusted for depreciation
Answer: B) Included in the lease receivable calculation
Explanation:
A lessor includes the guaranteed residual value in the lease receivable when calculating
the present value of lease payments to be collected.
Question 15
What is the Lessor’s Journal Entry for Accrued Interest Revenue at Year-End for a Sales-Type Lease?
A) Debit Lease Receivable, Credit Interest Revenue
B) Debit Interest Revenue, Credit Lease Receivable
C) Debit Interest Expense, Credit Lease Receivable
D) Debit Lease Liability, Credit Interest Revenue
Answer: A) Debit Lease Receivable, Credit Interest Revenue
Explanation:
At year-end, the lessor debits Lease Receivable and credits Interest Revenue to record the
accrued interest on a sales-type lease.
Question 16
When Does a Lessee Record Lease Expense for an Operating Lease?
A) Only at the end of the lease term
B) At the beginning of each payment period
C) At the end of each reporting period
D) When the asset is fully depreciated
Answer: C) At the end of each reporting period
Explanation:
For an operating lease, the lessee records lease expense periodically, typically at the end
of each reporting period, based on the lease payment schedule.
Question 17
How Does the Lessee Record an Amortization Expense for a Finance Lease?
A) Debit Interest Expense, Credit Lease Liability
B) Debit Amortization Expense, Credit Right-of-Use Asset
C) Debit Lease Receivable, Credit Amortization Expense
D) Debit Lease Liability, Credit Amortization Expense
Answer: B) Debit Amortization Expense, Credit Right-of-Use Asset
Explanation:
In a finance lease, the lessee records amortization by debiting Amortization Expense and
crediting the Right-of-Use Asset for the amount of the amortization.
Question 18
What Is a Lessee’s Incremental Borrowing Rate Used For?
A) To determine the total amount of lease payments
B) To calculate the interest expense on the lease liability
C) To calculate the amortization of the lease asset
D) To determine whether the lease is operating or finance
Answer: B) To calculate the interest expense on the lease liability
Explanation:
The Incremental Borrowing Rate is used by the lessee to calculate the interest expense on
the lease liability when the implicit rate of the lease is unknown.
Question 19
What Is a Variable Lease Payment?
A) A lease payment that changes based on the index or rate
B) A lease payment that remains constant over the lease term
C) A payment the lessee makes for repairs and maintenance
D) A lease payment calculated based on the residual value
Answer: A) A lease payment that changes based on the index or rate
Explanation:
Variable Lease Payments are payments that fluctuate during the lease term, typically
based on changes in an index or rate (e.g., inflation index).
Question 20
What Does the Purchase Option Test Help Determine?
A) If the lessee has the option to purchase the leased asset at a bargain price
B) If the lessor can repurchase the asset during the lease
C) Whether the asset’s residual value will increase
D) Whether the lease payments will change based on market value
Answer: A) If the lessee has the option to purchase the leased asset at a bargain price
Explanation:
The Purchase Option Test determines if the lessee has the option to buy the asset at a
price significantly below its fair value, helping to classify the lease as finance or
operating.
