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- December 15, 2024
Question 41
What is the Lessor’s Journal Entry for the End-of-Year Lease Revenue in an Operating
Lease?
A) Debit Unearned Revenue, Credit Lease Revenue
B) Debit Lease Revenue, Credit Unearned Revenue
C) Debit Lease Liability, Credit Interest Revenue
D) Debit Lease Receivable, Credit Lease Revenue
Answer: A) Debit Unearned Revenue, Credit Lease Revenue
Explanation:
At the end of the year, the lessor debits Unearned Revenue and credits Lease Revenue to
recognize earned lease income in an operating lease.
Question 42
How Should a Lessee Account for Initial Direct Costs in a Finance Lease?
A) Add them to the right-of-use asset
B) Record them as a liability
C) Subtract them from the lease payments
D) Record them as an immediate expense
Answer: A) Add them to the right-of-use asset
Explanation:
Initial direct costs incurred by the lessee in a finance lease are added to the right-of-use
asset and amortized over the lease term.
Question 43
What is the Journal Entry for the Lessor’s Depreciation in an Operating Lease?
A) Debit Depreciation Expense, Credit Accumulated Depreciation
B) Debit Lease Revenue, Credit Accumulated Depreciation
C) Debit Accumulated Depreciation, Credit Depreciation Expense
D) Debit Lease Receivable, Credit Depreciation Expense
Answer: A) Debit Depreciation Expense, Credit Accumulated Depreciation
Explanation:
The lessor records depreciation on the leased asset by debiting Depreciation Expense and
crediting Accumulated Depreciation in an operating lease.
Question 44
What is the Lease Term Test?
A) A test to determine if the lease term is a major part of the asset’s economic
life
B) A test to determine the fair value of the lease payments
C) A test to calculate the interest rate of the lease
D) A test to determine the residual value of the asset at the end of the lease
Answer: A) A test to determine if the lease term is a major part of the asset’s economic
life
Explanation:
The Lease Term Test is used to assess whether the lease term covers a major part
(typically 75% or more) of the asset’s economic life, influencing the classification of the
lease.
Question 45
How is the Lease Liability for a Finance Lease Recorded by the Lessee?
A) At the present value of the lease payments over the lease term
B) At the historical cost of the leased asset
C) At the total amount of the lease payments
D) At the fair market value of the leased asset
Answer: A) At the present value of the lease payments over the lease term
Explanation:
The lease liability for a finance lease is initially recorded by the lessee as the present
value of the lease payments over the lease term.
Question 46
What Happens When the Fair Value of a Leased Asset is Less Than its Guaranteed
Residual Value?
A) The lessee must pay the difference to the lessor
B) The lessee returns the asset with no further obligations
C) The lessor compensates the lessee for the loss
D) The lease is converted to an operating lease
Answer: A) The lessee must pay the difference to the lessor
Explanation:
If the fair value of the leased asset is less than its guaranteed residual value, the lessee
must compensate the lessor for the shortfall.
Question 47
How Does a Lessee Recognize Interest Expense on a Finance Lease?
A) By applying the effective interest method to the lease liability
B) By recognizing the total interest at the end of the lease term
C) By applying the incremental borrowing rate to the right-of-use asset
D) By recognizing the interest as part of the lease payment
Answer: A) By applying the effective interest method to the lease liability
Explanation:
The lessee recognizes interest expense on a finance lease by applying the effective
interest method to the outstanding lease liability, reducing the liability over time.
Question 48
What is the Lessee’s Journal Entry for an Initial Finance Lease?
A) Debit Right-of-Use Asset, Credit Lease Liability
B) Debit Lease Receivable, Credit Lease Liability
C) Debit Lease Revenue, Credit Lease Liability
D) Debit Right-of-Use Asset, Credit Cash
Answer: A) Debit Right-of-Use Asset, Credit Lease Liability
Explanation:
When entering into a finance lease, the lessee debits the Right-of-Use Asset and credits
Lease Liability for the present value of the lease payments.
Question 49
What is the Purpose of the Transfer of Ownership Test?
A) To determine if ownership of the leased asset will transfer to the lessee by the
end of the lease term
B) To determine if the lessor can take back the asset during the lease term
C) To calculate the residual value of the asset
D) To determine if the lease is short-term or long-term
Answer: A) To determine if ownership of the leased asset will transfer to the lessee by
the end of the lease term
Explanation:
The Transfer of Ownership Test checks if the leased asset's ownership transfers to the
lessee by the end of the lease, which is a key factor in lease classification.
Question 50
How is the Amortization of a Right-of-Use Asset in a Finance Lease Calculated?
A) Based on the total lease payments
B) Over the asset’s remaining economic life
C) Over the lease term, unless there is a purchase option, in which case the
asset’s economic life is used
D) Based on the residual value of the asset
Answer: C) Over the lease term, unless there is a purchase option, in which case the
asset's economic life is used
Explanation:
Amortization of a Right-of-Use Asset in a finance lease is calculated over the lease term
unless a purchase option is expected to be exercised, in which case the asset’s economic
life is used
