Lease MCQs

Howell Corporation, a publicly traded corporation, is the lessee in a leasing agreement with Brandon, Inc. to lease land and a building. If the lease ...

Operating lease and capital lease, respectively.
Capital lease and operating lease, respectively.
Capital lease but recorded as a single unit.
Capital lease but separately classified.

Plantation Restaurant should treat the lease agreement with Cutter Electronics as a(n)

Capital lease with an initial asset value of $10,960.
Capital lease with an initial asset value of $10,200.
Operating lease, charging $3,500 in rental expense and $500 in executory costs to annual operations.
Capital lease with an initial asset value of $9,590.

Plantation Restaurant should treat the lease agreement with Cutter Electronics as a(n)

Which of the following statements about a capital lease is false?

The lessor capitalizes the net investment in the lease.
The lessor records the leased item as an asset.
The lessee records depreciation or capital cost allowance on the leased asset.
The lease arrangement represents a form of financing.

If a company uses off-balance-sheet financing, assets have been acquired

For cash.
With operating leases.
With financing leases.
With a line of credit.

Which one of the following statements with respect to leases is correct?

An operating lease is treated like a rental contract between the lessor and lessee.
A lease that does not transfer ownership from the lessor to the lessee by the end of the lease is automatically an operating lease.
Sales and direct financing leases pertain more to lessees than lessors.
Unpredictability of lease revenues or expenses can transform what would otherwise be a capital lease for the lessee into an operating lease for the lessee.

Fact Pattern: Neary Company has entered into a contract to lease computers from Baldwin Company starting on January 1, Year 1. Releva...

Asset only.
Asset and a liability.
Liability only.
Expense and a liability.

Fact Pattern: Neary Company has entered into a contract to lease computers from Baldwin Company starting on January 1, Year 1. Releva...

$20,000
$21,000
$25,000
$26,250

On January 1, Rosewater Company leased a computer for 4 years at a monthly rent of $80, payable at the end of each month. Due to the rate of technical...

$26 and depreciation expense of $66.
$0 and rent expense of $80.
$29 and depreciation expense of $58.
$29 and rent expense of $80.

Keller Corporation signed a 3-year lease for an automobile on December 1. The automobile had a list price of $17,000 and an estimated useful life of 8...

Capital lease.
Operating lease
Sale-leaseback.
Sales-type lease.

Lease M does not contain a bargain purchase option, but the lease term is equal to 90% of the estimated economic life of the leased property. Lease P...

Capital lease Operating lease
Capital lease Capital lease
Operating lease Capital lease
Operating lease Operating lease

Bain Co. entered into a 10-year lease agreement for a new piece of equipment worth $500,000. At the end of the lease, Bain will have the option to pu...

The lease includes an option to purchase stock in the company.
The estimated useful life of the leased asset is 12 years.
The present value of the minimum lease payments is $400,000.
The purchase option at the end of the lease is at fair market value.

Which of the following is a criterion for a lease to be classified as a capital lease in the books of a lessee?

The lease contains a bargain purchase option.
The lease does not transfer ownership of the property to the lessee.
The lease term is equal to 65% or more of the estimated useful life of the leased property.
The present value of the minimum lease payments is 70% or more of the fair market value of the leased property.

Which of the following is a characteristic of a capital lease?

The lease term is substantially less than the estimated economic life of the leased property.
The lease contains a bargain-purchase option.
The present value of the minimum lease payments at the beginning of the lease term is 75% or more of the fair value of the property at the inception of the lease.
The future obligation does not appear in the balance sheet of the lessee.

The present value of minimum lease payments should be used by the lessee in determining the amount of a lease liability under a lease classified by t...

Yes Yes
Yes No
No No
No Yes

Koby Co. entered into a capital lease with a vendor for equipment on January 2 for 7 years. The equipment has no guaranteed residual value. The lease...

$500,000
$825,000
$2,675,000
$3,500,000

Quick Company’s lease payments are made at the end of each period. Quick’s liability for a capital lease will be reduced periodically by the

Minimum lease payment less the portion of the minimum lease payment allocable to interest.
Minimum lease payment plus the amortization of the related asset.
Minimum lease payment less the amortization of the related asset.
Minimum lease payment.

On January 1, Year 4, Harrow Co., as lessee, signed a 5-year noncancelable equipment lease with annual payments of $100,000 beginning December 31, Yea...

$37,900
$27,900
$24,200
$0

On January 2, Cole Co. signed an 8-year noncancelable lease for a new machine, requiring $15,000 annual payments at the beginning of each year. The ma...

$0
$9,000
$13,500
$15,000

Leases should be classified by the lessee as either operating leases or capital leases. Which of the following statements best characterizes operatin...

The benefits and risks of ownership are transferred from the lessor to the lessee.
The lessee records leased property as an asset and the present value of the lease payments as a liability.
Operating leases transfer ownership to the lessee, contain a bargain purchase option, are for more than 75% of the leased asset’s useful life, or have minimum lease payments with a present value in excess of 90% of the fair value of the leased asset.
The lessor records lease revenue, asset depreciation, maintenance, etc., and the lessee records lease payments as rental expense.

Leases should be classified by the lessee as either operating leases or capital leases. Which of the following statements best characterizes operatin...

Peg Co. leased equipment from Howe Corp. on July 1, year 1 for an eight-year period expiring June 30, year 9. Equal payments under the lease are $60...

$720,000 $176,000
$720,000 $146,000
$ 45,000 $176,000
$ 45,000 $146,000

Howe Co. leased equipment to Kew Corp. on January 2, year 1, for an eight-year period expiring December 31, year 8. Equal payments under the lease a...

$720,000
$500,000
$ 90,000
$0

The excess of the fair value of leased property at the inception of the lease over its cost or carrying amount should be classified by the lessor as...

Unearned income from a sales-type lease.
Unearned income from a direct-financing lease.
Manufacturer’s or dealer’s profit from a sales-type lease.
Manufacturer’s or dealer’s profit from a directfinancing lease.

In a lease that is recorded as a sales-type lease by the lessor, interest revenue

Should be recognized in full as revenue at the lease’s inception.
Should be recognized over the period of the lease using the straight-line method.
Should be recognized over the period of the lease using the interest method.
Does not arise.

Lease M does not contain a bargain purchase option, but the lease term is equal to 90% of the estimated economic life of the leased property. Lease ...

Capital lease Operating lease
Capital lease Capital lease
Operating lease Capital lease
Operating lease Operating lease

On December 31, year 1, Day Co. leased a new machine from Parr with the following pertinent information: Lease term 6 years Annual rental payable a...

$375,500
$230,500
$217,500
$0

On January 1, year 1, Day Corp. entered into a ten-year lease agreement with Ward, Inc. for industrial equipment. Annual lease payments of $10,000 a...

$63,374
$61,446
$58,112
$56,502

Robbins, Inc. leased a machine from Ready Leasing Co. The lease qualifies as a capital lease and requires ten annual payments of $10,000 beginning i...

$62,160
$64,860
$66,500
$69,720

Neal Corp. entered into a nine-year capital lease on a warehouse on December 31, year 1. Lease payments of $52,000, which includes real estate taxes...

$280,000
$291,200
$450,000
$468,000

East Company leased a new machine from North Company on May 1, year 1, under a lease with the following information: Lease term 10 years Annual ren...

$251,500
$238,000
$224,500
$198,000

On January 1, year 1, Babson, Inc. leased two automobiles for executive use. The lease requires Babson to make five annual payments of $13,000 begin...

$48,620
$44,070
$35,620
$31,070

On December 30, year 1, Rafferty Corp. leased equipment under a capital lease. Annual lease payments of $20,000 are due December 31 for ten years. T...

$ 6,500
$ 8,500
$11,500
$20,000

Oak Co. leased equipment for its entire nine-year useful life, agreeing to pay $50,000 at the start of the lease term on December 31, year 1, and $5...

$350,000
$243,150
$228,320
$0

On December 31, year 1, Roe Co. leased a machine from Colt for a five-year period. Equal annual payments under the lease are $105,000 (including $5,...

$317,000
$315,000
$285,300
$248,700

In the long-term liabilities section of its balance sheet at December 31, year 1, Mene Co. reported a capital lease obligation of $75,000, net of cu...

$66,000
$73,500
$73,636
$74,250

For a capital lease, the amount recorded initially by the lessee as a liability should normally

Exceed the total of the minimum lease payments.
Exceed the present value of the minimum lease payments at the beginning of the lease.
Equal the total of the minimum lease payments.
Equal the present value of the minimum lease payments at the beginning of the lease

At the inception of a capital lease, the guaranteed residual value should be

Included as part of minimum lease payments at present value.
Included as part of minimum lease payments at future value.
Included as part of minimum lease payments only to the extent that guaranteed residual value is expected to exceed estimated residual value.
Excluded from minimum lease payments.

A six-year capital lease entered into on December 31, year 1, specified equal minimum annual lease payments due on December 31 of each year. The fir...

Yes Yes
Yes No
No Yes
No No

A six-year capital lease expiring on December 31 specifies equal minimum annual lease payments. Part of this payment represents interest and part re...

Less than in the fourth year.
More than in the fourth year.
The same as in the sixth year.
More than in the sixth year.

A lessee had a ten-year capital lease requiring equal annual payments. The reduction of the lease liability in year two should equal

The current liability shown for the lease at the end of year one.
The current liability shown for the lease at the end of year two.
The reduction of the lease obligation in year one.
One-tenth of the original lease liability.

On January 2, year 1, Cole Co. signed an eight-year noncancelable lease for a new machine, requiring $15,000 annual payments at the beginning of eac...

$0
$ 9,000
$13,500
$15,000

On January 2, year 1, Nori Mining Co. (lessee) entered into a five-year lease for drilling equipment. Nori accounted for the acquisition as a capita...

$48,000
$46,000
$30,000
$27,500

On January 1, year 1, Harrow Co. as lessee signed a five-year noncancelable equipment lease with annual payments of $100,000 beginning December 31, ...

$37,900
$27,900
$24,200
$0

On January 1, year 1, West Co. entered into a ten-year lease for a manufacturing plant. The annual minimum lease payments are $100,000. In the notes...

$100,000 $0
$300,000 $500,000
$500,000 $800,000
$500,000 $0

Cott, Inc. prepared an interest amortization table for a fiveyear lease payable with a bargain purchase option of $2,000, exercisable at the end of ...

The beginning present value of the lease did not include the present value of the bargain purchase option.
Cott subtracted the annual interest amount from the lease payable balance instead of adding it.
The present value of the bargain purchase option was subtracted from the present value of the annual payments.
Cott discounted the annual payments as an ordinary annuity, when the payments actually occurred at the beginning of each period.

On December 31, year 1, Lane, Inc. sold equipment to Noll, and simultaneously leased it back for twelve years. Pertinent information at this date is...

$0
$110,000
$112,000
$120,000

The following information pertains to a sale and leaseback of equipment by Mega Co. on December 31, year 1: Sales price $400,000 Carrying amount $3...

$0
$ 36,900
$ 63,100
$100,000

On December 31, year 1, Parke Corp. sold Edlow Corp. an airplane with an estimated remaining useful life of ten years. At the same time, Parke lease...

$0
$190,581
$309,419
$500,000

On June 30, year 1, Lang Co. sold equipment with an estimated useful life of eleven years and immediately leased it back for ten years. The equipmen...

$35,000
$20,000
$15,000
$0

On January 1, year 1, Hooks Oil Co. sold equipment with a carrying amount of $100,000, and a remaining useful life of ten years, to Maco Drilling fo...

$50,000
$45,000
$25,588
$0

In a sale-leaseback transaction, the seller-lessee has retained the property. The gain on the sale should be recognized at the time of the sale-leas...

Yes Yes
No No
No Yes
Yes No

Able sold its headquarters building at a gain, and simultaneously leased back the building. The lease was reported as a capital lease. At the time o...

Operating income.
An extraordinary item, net of income tax.
A separate component of stockholders’ equity.
An asset valuation allowance.

On January 1, year 1, Goliath entered into a five-year operating lease for equipment. In January year 3, Goliath decided that it no longer needs the...

Recognize $3,000 termination cost in year 3 as a loss from continuing operations.
Recognize $1,000 termination cost each year for the remaining three years of the lease term.
Recognize the $3,000 termination cost as an extraordinary item in year 3.
Recognize the $3,000 termination cost as a discontinued operation in year 3

In January year 1, Hopper Corp. signed a capital lease for equipment with a term of twenty years. In year 3, Hopper negotiated a modification to a c...

Recognize an $8,000 gain from lease modification during year 3.
Defer the gain and recognize it over the life of the operating lease.
Recognize the $8,000 gain as an extraordinary item in year 3.
Recognize the $8,000 gain as a discontinued operation in year 3.

On January 1, year 1, Belkor entered into a 10-year capital lease for equipment. On December 1, year 4, Belkor terminates the capital lease and incu...

Recognize a $20,000 loss in year 4 as a discontinued operation.
Recognize a $20,000 loss in year 4 as an extraordinary item.
Recognize a $20,000 loss from continuing operations in year 4.
Defer recognition of the loss and recognize pro rata over the life of the lease term.

Morgan Corp. signs a lease to rent equipment for ten years. The lease payments of $10,000 per year are due on January 2 each year. At the end of the...

Operating lease.
Capital lease.
Finance lease.
Sales-type lease.

Santiago Corp. signs an agreement to lease land and a building for 20 years. At the end of the lease, the property will not transfer to Santiago. Th...

The lease is recorded as a finance lease.
The lease is recorded as an operating lease.
The land is recorded as an operating lease, and the building is recorded as a finance lease.
The land is recorded as a finance lease, and the building is recorded as an operating lease.

Which of the following is not true regarding lease accounting under IFRS?

Lease payments under operating leases are recognized on a straight-line basis over the life of the lease.
Leases are classified as either operating or finance leases by both the lessee and the lessor.
For a finance lease, the asset is removed from the lessor’s balance sheet.
IFRS uses the same thresholds as US GAAP to determine if a lease is an operating lease or a finance lease.

Under IFRS what is the interest rate used by lessees to capitalize a finance lease when the implicit rate cannot be determined?

The prime rate.
The lessor’s published rate.
The lessee’s average borrowing rate.
The lessee’s incremental borrowing rate.

A corporation signed a 3-year lease for an automobile on December 1. The automobile had a list price of $17,000 and an estimated useful life of 8 year...

Capital lease
Operating lease.
Sale-leaseback.
Sales-type lease.

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Lease MCQs