OA Exams

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Question 01

When does a lessee record a right-of-use asset under a finance lease?

A) At the end of the lease term

B) At the lease commencement date

C) When the lease payments begin

D) After the first payment is made

Answer: B) At the lease commencement date

Explanation:
The right-of-use asset is recorded at the lease commencement date, which is the date the
lessor makes the underlying asset available for use by the lessee.

Question 02

Which costs should be included in the calculation of the right-of-use asset?

A) Only the lease payments

B) Lease payments, initial direct costs, and incentives received from the lessor

C) Interest expense only

D) Only payments made in advance

Answer: B) Lease payments, initial direct costs, and incentives received from the lessor

Explanation:
The right-of-use asset should include lease payments, any initial direct costs incurred by
the lessee, and any lease incentives received from the lessor.

Question 03

What is the term for a lessee’s obligation to return the leased asset at the end of the lease
term?

A) Residual value

B) Lease liability

C) Purchase option

D) Lease guarantee

Answer: A) Residual value

Explanation:
Residual value refers to the expected value of the leased asset at the end of the lease term,
which the lessee is responsible for returning.

Question 04

When is a lease payment considered a financing activity in the statement of cash flows?

A) If the lease is classified as an operating lease

B) If the lease is classified as a finance lease

C) When lease payments exceed $1,000

D) When the lessee does not own the leased asset

Answer: B) If the lease is classified as a finance lease

Explanation:
Lease payments under a finance lease are considered financing activities because they
represent a repayment of the lease liability.

Question 05

Which component is excluded when calculating lease liability for a lessee?

A) Fixed lease payments

B) Variable lease payments tied to an index

C) Interest expense

D) Unguaranteed residual value

Answer: D) Unguaranteed residual value

Explanation:
Unguaranteed residual value is excluded from the lease liability calculation as the lessee
has no obligation for it.

Question 06

What happens to the lease liability over time in a finance lease?

A) It remains the same throughout the lease term

B) It increases as interest accrues

C) It decreases with each payment made by the lessee

D) It is written off at the start of the lease

Answer: C) It decreases with each payment made by the lessee

Explanation:
In a finance lease, each lease payment reduces the lease liability, while part of the
payment is recognized as interest expense.

Question 07

How is an unguaranteed residual value treated in a finance lease by the lessor?

A) Included in the lease receivable

B) Excluded from the lease receivable

C) Included as an expense

D) Written off as a loss

Answer: A) Included in the lease receivable

Explanation:
For the lessor, an unguaranteed residual value is included in the lease receivable as it
reflects the amount the lessor expects to recover from the asset at the end of the lease.

Question 08

What type of pension plan transfers the risk of investment losses to the employees?

A) Defined contribution plan

B) Defined benefit plan

C) Noncontributory pension plan

D) Employee stock option plan

Answer: A) Defined contribution plan

Explanation:
Under a defined contribution plan, employees bear the risk of investment gains and
losses, as the employer only contributes a defined amount.

Question 09

In a defined benefit plan, who is responsible for ensuring the plan has enough funds to
pay future benefits?

A) The employee

B) The employer

C) The government

D) An independent trustee

Answer: B) The employer

Explanation:
In a defined benefit plan, the employer is responsible for ensuring the plan is adequately
funded to meet future retirement benefit obligations.

Question 10

Which event would require a company to restate its prior financial statements?

A) Change in depreciation method

B) Mathematical error in revenue recognition

C) Change in management structure

D) Hiring of a new auditor

Answer: B) Mathematical error in revenue recognition

Explanation:
Errors such as mathematical mistakes in financial statements require restatement of prior
periods to correct the mistake.

Question 11

How should a lessee treat lease incentives received from a lessor?

A) Exclude from the right-of-use asset calculation

B) Deduct from the right-of-use asset

C) Add to the lease liability

D) Recognize as lease income

Answer: B) Deduct from the right-of-use asset

Explanation:
Lease incentives reduce the right-of-use asset, as they effectively lower the lessee’s cost
of using the leased asset

Question 12

A lessor uses which method to measure the extent of progress toward completion under
the percentage-of-completion method?

A) Output method

B) Cost-to-cost basis

C) Residual method

D) Percentage of profit margin

Answer: B) Cost-to-cost basis

Explanation:
The cost-to-cost basis compares the costs incurred to date with the total estimated costs to
complete the contract, reflecting progress toward completion

Question 13

What is the primary factor used to determine if a contract is a finance lease?

A) The length of the lease term

B) The interest rate charged by the lessor

C) Whether the lessee has an option to purchase the asset

D) Whether the lease transfers control of the underlying asset to the lessee

Answer: D) Whether the lease transfers control of the underlying asset to the lessee

Explanation:
A finance lease transfers control of the underlying asset to the lessee, either through
ownership transfer or by allowing the lessee to consume a substantial portion of the asset.

Question 14

Which activity would be classified as an investing activity in the statement of cash flows?

A) Purchase of inventory

B) Payment of dividends

C) Sale of a building

D) Payment of wages

Answer: C) Sale of a building

Explanation:
Investing activities include the purchase and sale of long-term assets, such as buildings,
equipment, and securities.

Question 15

How does a company typically account for changes in accounting estimates?

A) By applying the change retrospectively

B) By applying the change prospectively

C) By restating prior years’ financial statements

D) By recognizing a one-time adjustment in the current year

Answer: B) By applying the change prospectively

Explanation:
Changes in accounting estimates are applied prospectively, meaning they only affect the
current and future financial statements.

Question 16

 How should a company report the cumulative effect of a change in accounting principle?

A) On the income statement as an extraordinary item

B) As a prior period adjustment on the balance sheet

C) In the current year’s retained earnings statement

D) On the cash flow statement as an adjustment

Answer: C) In the current year’s retained earnings statement

Explanation:
The cumulative effect of a change in accounting principle is typically reported as an
adjustment to the beginning balance of retained earnings in the earliest period presented.

Question 17

How are errors in financial statements treated if discovered after the financial
statements are issued?

A) Adjust the current year’s financial statements

B) Restate the prior year’s financial statements

C) Make a note in the footnotes and take no further action

D) Include in the income statement as a correction

Answer: B) Restate the prior year’s financial statements

Explanation:
Material errors discovered after the issuance of financial statements require restating
prior period financial statements to correct the error.

Question 18

Which of the following represents a counterbalancing error?

A) Failure to record a tax liability

B) Overstatement of revenue in one period, corrected in the next

C) Failure to depreciate an asset for multiple years

D) Incorrect recording of a long-term liability

Answer: B) Overstatement of revenue in one period, corrected in the next

Explanation:
Counterbalancing errors are those that correct themselves over two periods, such as an
overstatement of revenue in one period being offset by an understatement in the next.

Question 19

Which type of lease allows the lessee to depreciate the asset over its useful life rather
than the lease term?

A) Operating lease

B) Short-term lease

C) Finance lease with a bargain purchase option

D) Sale-type lease

Answer: C) Finance lease with a bargain purchase option

Explanation:
If a finance lease contains a bargain purchase option, the lessee is expected to acquire the
asset at the end of the lease and can depreciate it over its useful life

Question 20

Which method of depreciation is typically used by lessees for finance leases?

A) Units of production

B) Straight-line depreciation

C) Declining balance method

D) Sum-of-the-years-digits

Answer: B) Straight-line depreciation

Explanation:
Lessees generally use straight-line depreciation for finance leases, spreading the cost of
the asset evenly over its useful life or the lease term.

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