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web.groovymark@gmail.com
- December 15, 2024
Question 01
What is the Journal Entry for the Lessee’s First Lease Payment in an Operating Lease?
A) Debit Lease Expense, Credit Cash
B) Debit Lease Liability, Credit Cash
C) Debit Right-of-Use Asset, Credit Lease Liability
D) Debit Lease Receivable, Credit Cash
Answer: A) Debit Lease Expense, Credit Cash
Explanation:
The lessee records the first lease payment in an operating lease by debiting Lease
Expense and crediting Cash.
Question 02
What is a Bargain Purchase Option in a Lease?
A) A lessee’s right to purchase the leased asset at a price significantly lower than
the asset’s fair value
B) A lessor’s option to sell the asset to the lessee at market value
C) The lessee’s right to cancel the lease early
D) A guaranteed residual value payment
Answer: A) A lessee's right to purchase the leased asset at a price significantly lower
than the asset's fair value
Explanation:
A Bargain Purchase Option allows the lessee to purchase the leased asset at a price
significantly lower than its expected fair value at the end of the lease.
Question 03
How Should Initial Direct Costs be Accounted for in an Operating Lease?
A) Capitalize and amortize them over the lease term
B) Expense them immediately
C) Include them in the lease liability
D) Recognize them as lease revenue
Answer: A) Capitalize and amortize them over the lease term
Explanation:
Initial direct costs in an operating lease are capitalized and amortized over the lease term
in proportion to the recognition of lease revenue.
Question 04
Which Lease Classification Test Determines if a Lease Transfers Ownership to the Lessee?
A) Lease Term Test
B) Purchase Option Test
C) Transfer of Ownership Test
D) Present Value Test
Answer: C) Transfer of Ownership Test
Explanation:
The Transfer of Ownership Test determines whether ownership of the leased asset is
transferred to the lessee by the end of the lease.
Question 05
What is the Lessee’s Journal Entry for the Second Lease Payment in a Finance Lease?
A) Debit Lease Liability, Credit Cash
B) Debit Lease Expense, Credit Lease Liability
C) Debit Right-of-Use Asset, Credit Cash
D) Debit Interest Expense, Credit Lease Liability
Answer: A) Debit Lease Liability, Credit Cash
Explanation:
The lessee records the second lease payment in a finance lease by debiting Lease
Liability and crediting Cash.
Question 06
When is the Present Value Test Used in Lease Classification?
A) When determining if the lease term is a major part of the asset’s economic
life
B) When calculating the residual value of the leased asset
C) When assessing whether the present value of lease payments is 90% or more
of the asset’s fair value
D) When deciding if the lease transfers ownership to the lessee
Answer: C) When assessing whether the present value of lease payments is 90% or more
of the asset's fair value
Explanation:
The Present Value Test is used to determine whether the present value of the lease
payments is equal to or greater than 90% of the asset’s fair value.
Question 07
How Should a Lessor Account for a Finance Lease with Unguaranteed Residual Value?
A) Exclude it from the lease receivable
B) Include it in the lease receivable calculation
C) Record it as unearned revenue
D) Include it only if the lessee guarantees the amount
Answer: B) Include it in the lease receivable calculation
Explanation:
The lessor includes unguaranteed residual value in the calculation of the lease receivable
in a finance lease.
Question 08
What is the Journal Entry for Lessee’s Initial Recognition of a Finance Lease?
A) Debit Right-of-Use Asset, Credit Lease Liability
B) Debit Lease Expense, Credit Cash
C) Debit Lease Receivable, Credit Cash
D) Debit Right-of-Use Asset, Credit Unearned Revenue
Answer: A) Debit Right-of-Use Asset, Credit Lease Liability
Explanation:
The lessee debits the Right-of-Use Asset and credits Lease Liability when initially
recognizing a finance lease.
Question 09
What is the Purpose of the Alternative Use Test in Lease Classification?
A) To determine if the asset can be used for alternative purposes at the end of the
lease
B) To assess whether the asset will be transferred to the lessee
C) To determine if the asset has a residual value
D) To assess whether the lease payments will exceed the fair value of the asset
Answer: A) To determine if the asset can be used for alternative purposes at the end of
the lease
Explanation:
The Alternative Use Test determines if the lessor has any alternative use for the asset at
the end of the lease, affecting lease classification.
Question 10
How is Lease Revenue Recognized by the Lessor in a Sales-Type Lease?
A) Over the lease term
B) At the inception of the lease
C) When lease payments are received
D) At the end of the lease term
Answer: B) At the inception of the lease
Explanation:
In a sales-type lease, the lessor recognizes lease revenue at the inception of the lease.
Question 11
What is the Journal Entry for a Lessee’s First Payment in a Finance Lease?
A) Debit Lease Liability, Credit Cash
B) Debit Interest Expense, Credit Lease Liability
C) Debit Right-of-Use Asset, Credit Lease Liability
D) Debit Lease Receivable, Credit Lease Liability
Answer: A) Debit Lease Liability, Credit Cash
Explanation:
The lessee debits Lease Liability and credits Cash for the first payment in a finance lease.
Question 12
When is the Lease Term Test Used?
A) To determine if the lease transfers ownership to the lessee
B) To assess if the lease term is a major part of the asset’s economic life
C) To calculate the interest rate of the lease
D) To determine the residual value of the asset
Answer: B) To assess if the lease term is a major part of the asset’s economic life
Explanation:
The Lease Term Test determines whether the lease term covers a significant portion of
the asset's economic life, influencing lease classification.
Question 13
What is a Service-Type Warranty?
A) A warranty that the product meets agreed-upon specifications at the time of
sale
B) A warranty that provides additional services beyond an assurance-type
warranty
C) A warranty that guarantees the performance of the product for its entire life
D) A warranty that applies only to finance leases
Answer: B) A warranty that provides additional services beyond an assurance-type
warranty
Explanation:
A service-type warranty offers additional services beyond the product's original
assurance-type warranty.
Question 14
How Should a Lessee Account for Prepaid Lease Payments?
A) Debit Lease Expense, Credit Cash
B) Debit Right-of-Use Asset, Credit Cash
C) Debit Lease Liability, Credit Cash
D) Debit Prepaid Lease Expense, Credit Lease Liability
Answer: B) Debit Right-of-Use Asset, Credit Cash
Explanation:
Prepaid lease payments made by the lessee are accounted for by debiting Right-of-Use
Asset and crediting Cash.
Question 15
How Does a Lessor Record Lease Revenue in a Finance Lease?
A) Debit Lease Receivable, Credit Lease Revenue
B) Debit Cash, Credit Lease Receivable
C) Debit Unearned Revenue, Credit Lease Revenue
D) Debit Lease Liability, Credit Cash
Answer: B) Debit Cash, Credit Lease Receivable
Explanation:
The lessor records lease revenue in a finance lease by debiting Cash and crediting Lease
Receivable.
Question 16
What is the Purchase Option Test in Lease Classification?
A) A test to determine if the lessee has a purchase option in the lease agreement
B) A test to calculate the purchase price of the leased asset
C) A test to assess whether the purchase option is a bargain purchase option
D) A test to determine the market value of the leased asset
Answer: C) A test to assess whether the purchase option is a bargain purchase option
Explanation:
The Purchase Option Test determines whether the purchase option included in the lease is
a bargain purchase option.
Question 17
What is the Journal Entry for the Lessor’s Initial Sales-Type Lease?
A) Debit Lease Receivable, Debit Cost of Goods Sold, Credit Inventory, Credit
Sales Revenue
B) Debit Lease Revenue, Credit Lease Liability
C) Debit Cash, Credit Lease Receivable
D) Debit Interest Expense, Credit Lease Receivable
Answer: A) Debit Lease Receivable, Debit Cost of Goods Sold, Credit Inventory, Credit
Sales Revenue
Explanation:
The lessor records the initial sales-type lease by debiting Lease Receivable and Cost of
Goods Sold and crediting Inventory and Sales Revenue.
Question 18
How Should a Lessor Account for Lease Receivable in a Sales-Type Lease?
A) Exclude any unguaranteed residual value from the calculation
B) Include the guaranteed residual value but exclude unguaranteed residual value
C) Include both guaranteed and unguaranteed residual value in the calculation
D) Only include the lease payments in the receivable calculation
Answer: C) Include both guaranteed and unguaranteed residual value in the calculation
Explanation:
In a sales-type lease, the lessor includes both guaranteed and unguaranteed residual
values in the calculation of the lease receivable.
Question 19
What is the Effect of Initial Direct Costs on a Right-of-Use Asset?
A) They reduce the right-of-use asset
B) They increase the right-of-use asset
C) They are expensed immediately
D) They are recorded as a liability
Answer: B) They increase the right-of-use asset
Explanation:
Initial direct costs incurred by the lessee increase the value of the right-of-use asset.
Question 20
When Should the Lessee Include a Guaranteed Residual Value in Lease Liability?
A) Always
B) Only when the residual value is greater than the expected fair value
C) Only when the lease term exceeds 75% of the asset’s life
D) Never
Answer: B) Only when the residual value is greater than the expected fair value
Explanation:
The lessee includes a guaranteed residual value in lease liability only if the guaranteed
amount is greater than the expected fair value.
