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- December 15, 2024
Question 21
What Is the Journal Entry for a Lessor’s Initial Sales-Type Lease?
A) Debit Lease Receivable, Debit COGS, Credit Inventory, Credit Sales
Revenue
B) Debit Inventory, Credit Lease Receivable, Credit Sales Revenue
C) Debit Lease Liability, Credit Interest Revenue, Credit Inventory
D) Debit Sales Revenue, Credit COGS
Answer: A) Debit Lease Receivable, Debit COGS, Credit Inventory, Credit Sales
Revenue
Explanation:
In a sales-type lease, the lessor records the sale by debiting Lease Receivable and COGS,
while crediting Inventory and Sales Revenue to reflect the transfer of control.
Question 22
What is the Present Value Test?
A) A test to determine if the present value of the lease payments is at least 75%
of the asset’s fair value
B) A test to check if the present value of the lease payments is 90% or more of
the asset’s fair value
C) A test to determine the economic life of the asset
D) A test to calculate the depreciation expense of the asset
Answer: B) A test to check if the present value of the lease payments is 90% or more of
the asset’s fair value
Explanation:
The Present Value Test is used to evaluate if the present value of the lease payments
covers 90% or more of the asset's fair value, classifying the lease as a finance lease.
Question 23
What is an Unguaranteed Residual Value?
A) The value of the asset that the lessee is responsible for at the end of the lease
B) The expected value of the asset at the end of the lease that the lessee does not
guarantee
C) The amount the lessee must pay to purchase the asset
D) The fair market value of the asset at the beginning of the lease term
Answer: B) The expected value of the asset at the end of the lease that the lessee does
not guarantee
Explanation:
An Unguaranteed Residual Value is the estimated value of the leased asset at the end of
the lease term, which the lessee is not responsible for ensuring or paying.
Question 24
How Does a Lessor Account for Lease Receivable in a Sales-Type Lease?
A) It excludes the residual value
B) It includes the residual value, both guaranteed and unguaranteed
C) It only includes the unguaranteed residual value
D) It excludes all residual values
Answer: B) It includes the residual value, both guaranteed and unguaranteed
Explanation:
The lessor includes both guaranteed and unguaranteed residual values in calculating the
lease receivable in a sales-type lease.
Question 25
How is a Right-of-Use Asset Initially Measured?
A) At the present value of the lease payments over the lease term
B) At the fair market value of the asset
C) At the historical cost of the asset
D) At the total value of the residual payments
Answer: A) At the present value of the lease payments over the lease term
Explanation:
The Right-of-Use Asset is measured as the present value of the lease payments that the
lessee will make over the lease term.
Question 26
When Does a Lease Qualify as a Short-Term Lease?
A) When the lease term is less than or equal to 12 months
B) When the lease term exceeds 12 months but the asset is low-value
C) When the residual value of the asset is less than $5,000
D) When the lease includes an option to purchase at the end of the term
Answer: A) When the lease term is less than or equal to 12 months
Explanation:
A lease is classified as a short-term lease if the term is less than or equal to 12 months
and does not include an option to purchase the underlying asset.
Question 27
What is the Purpose of the Alternative Use Test?
A) To determine if the lessee can sublease the asset to another party
B) To determine if the lessee has exclusive control over the asset during the lease
C) To evaluate if the asset will have an alternative use to the lessor at the end of
the lease
D) To determine if the lessee can purchase the asset at the end of the lease
Answer: C) To evaluate if the asset will have an alternative use to the lessor at the end of
the lease
Explanation:
The Alternative Use Test checks whether the leased asset will have an alternative use to
the lessor at the end of the lease term, helping to classify the lease as a finance or
operating lease.
Question 28
What Happens When the Lease Term Is a Major Part of the Asset’s Economic Life?
A) The lease is classified as an operating lease
B) The lease is classified as a finance lease
C) The lessor retains ownership of the asset
D) The asset’s value is written off immediately
Answer: B) The lease is classified as a finance lease
Explanation:
If the lease term represents a major part (typically 75% or more) of the asset's economic
life, the lease is classified as a finance lease.
Question 29
How Are Lease Incentive Payments from the Lessor to the Lessee Treated?
A) They are added to the right-of-use asset
B) They are subtracted from the right-of-use asset
C) They are ignored in the lease liability calculation
D) They are recorded as a separate revenue stream
Answer: B) They are subtracted from the right-of-use asset
Explanation:
Lease incentives reduce the cost of the right-of-use asset and are subtracted from its value
on the lessee’s balance sheet.
Question 30
What is the Difference Between Finance and Operating Leases?
A) A finance lease transfers ownership, while an operating lease does not
B) A finance lease is shorter than an operating lease
C) An operating lease always has lower payments
D) There is no difference in accounting for finance and operating leases
Answer: A) A finance lease transfers ownership, while an operating lease does not
Explanation:
The key difference is that a finance lease transfers ownership or control of the asset to the
lessee, while an operating lease does not transfer ownership.
Question 31
How is a Lease Term Calculated?
A) It is based on the useful life of the asset
B) It is the period of the lease including any optional renewal periods that are
reasonably certain to be exercised
C) It is the time period stated in the lease agreement
D) It is determined by the fair market value of the asset
Answer: B) It is the period of the lease including any optional renewal periods that are
reasonably certain to be exercised
Explanation:
The lease term includes the non-cancellable period of the lease and any optional renewal
periods that the lessee is reasonably certain to exercise.
Question 32
What Are the Elements of Lease Payments?
A) Fixed payments, variable payments, and residual value payments
B) Fixed payments, interest payments, and renewal option fees
C) Variable payments, renewal fees, and residual value payments
D) Maintenance costs, insurance, and variable payments
Answer: A) Fixed payments, variable payments, and residual value payments
Explanation:
Lease payments include fixed payments, variable payments based on an index, and
residual value payments if applicable.
Question 33
How Are Initial Direct Costs Incurred by the Lessor in an Operating Lease Handled?
A) They are expensed immediately
B) They are added to the carrying amount of the leased asset and recognized
over the lease term
C) They are subtracted from the lease receivable
D) They are ignored in the financial statements
Answer: B) They are added to the carrying amount of the leased asset and recognized
over the lease term
Explanation:
Initial direct costs incurred by the lessor in an operating lease are added to the leased
asset’s carrying amount and recognized over the lease term.
Question 34
What is the Lessor’s Journal Entry for the First Lease Payment in a Sales-Type Lease?
A) Debit Lease Receivable, Credit Cash
B) Debit Lease Liability, Credit Lease Receivable
C) Debit Cash, Credit Lease Receivable
D) Debit Interest Expense, Credit Lease Receivable
Answer: C) Debit Cash, Credit Lease Receivable
Explanation:
The lessor records the first lease payment in a sales-type lease by debiting Cash and
crediting Lease Receivable.
Question 35
When Does a Lessee Recognize Lease Liability for an Operating Lease?
A) At the beginning of the lease term
B) At the end of the lease term
C) When payments are overdue
D) When the asset is returned to the lessor
Answer: A) At the beginning of the lease term
Explanation:
The lessee recognizes the lease liability at the commencement of the lease term, which
reflects the present value of future lease payments.
Question 36
How Should a Lessor Account for Unguaranteed Residual Value in a Sales-Type Lease?
A) Exclude it from the lease receivable
B) Include it in the calculation of lease receivable
C) Recognize it as revenue
D) Ignore it if the asset will not be returned
Answer: B) Include it in the calculation of lease receivable
Explanation:
The unguaranteed residual value is included in the calculation of the lease receivable by
the lessor in a sales-type lease.
Question 37
What is the Purpose of the Lease Classification Test?
A) To determine the fair value of the lease
B) To decide whether a lease should be classified as a finance lease or an
operating lease
C) To calculate the interest rate of the lease
D) To decide how long the lease term should be
Answer: B) To decide whether a lease should be classified as a finance lease or an
operating lease
Explanation:
The Lease Classification Test helps determine whether a lease is classified as a finance
lease or an operating lease, based on criteria such as ownership transfer and lease term.
Question 38
When Should a Lessee Exclude a Residual Value from the Lease Liability Calculation?
A) When the residual value is unguaranteed
B) When the residual value is less than the fair value of the asset
C) When the lease term is less than 75% of the asset’s life
D) When the residual value is guaranteed
Answer: A) When the residual value is unguaranteed
Explanation:
A lessee excludes unguaranteed residual values from the lease liability calculation, as
they do not assume responsibility for the unguaranteed amount.
Question 39
How Does a Lessor Record a Lease Receivable in a Finance Lease?
A) It is recorded at the fair value of the leased asset
B) It is recorded as the present value of the lease payments plus any guaranteed
residual value
C) It is recorded as the total amount of lease payments
D) It is recorded only after the lease payments are received
Answer: B) It is recorded as the present value of the lease payments plus any guaranteed
residual value
Explanation:
In a finance lease, the lessor records the lease receivable as the present value of the lease
payments, including any guaranteed residual value.
Question 40
What is a Guaranteed Residual Value?
A) The value that the lessor promises to pay at the end of the lease term
B) The value the lessee guarantees to pay the lessor at the end of the lease term
C) The market value of the asset when the lease is signed
D) The amount the lessor promises to refund to the lessee
Answer: B) The value the lessee guarantees to pay the lessor at the end of the lease term
Explanation:
The Guaranteed Residual Value is the value that the lessee guarantees to pay the lessor if
the asset does not meet the residual value expectation at the end of the lease term
