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Leases

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This week's quiz brought to you by:
Barbara W. Scofield, PhD, CPA - Associate Professor of Accounting
and Director of the Financial Accounting Concentration
University of Dallas
Irving, Texas



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1 - A lease includes a title transfer at the end of the lease. Which of the following is true?
The lease is an operating lease, unless another capital lease criterion is met.
The lessee retains the leased asset at the end of the lease.
The lessor takes depreciation on the leased asset during the lease term.
The lessee pays the lessor the fair value of the leased asset at the end of the lease term in order to retain the asset

2 - A lease includes a bargain purchase of $2,000 at the end of the lease. Which of the following is true?
The lease is a capital lease for the lessee.
The lessor receives the leased asset back at the end of the lease term.
The lessor refunds $2,000 to the lessee at the end of the lease.
The lessee pays fair value of $2,000 for the leased asset at the end of the lease.

3 - A lease has a guaranteed residual of $2,000. At the end of the lease term the fair value of the leased asset is $1,000. Which of the following is true?
The lessor has a gain on settlement of the lease of $2,000.
The lessee has a loss on settlement of the lease of $2,000.
The lessee returns the leased asset to the lessor at the end of the lease term.
The lessee pays $2,000 to the lessor at the end of the lease term.

4 - A lease has an unguaranteed residual of $2,000. At the end of the lease term, its fair value at the end of the lease was $10,000. Which of the following is true?
The lessee recognizes a loss on lease settlement of $8,000
The lessor has a gain on lease settlement of $8,000
The lessor receives $2,000 plus the leased asset from the lessee at the end of the lease term.
The lessee receives $8,000 from the lessor at the end of the lease since the asset is worth $8,000 more than expected.

5 - A capital lease contract is written by the lessor to provide a 12% rate of return, but the lessee has an incremental borrowing rate of 10%. Which of the following is true?
The lessee's Lease Obligation is larger than the lessor's Lease Receivable.
The lessee's Lease Obligation is smaller than the lessor's Lease Receivable.
The lessee and the lessor have the same value for the lease.
The lease discount rate is 12% for both the lessee and the lessor.

6 - A capital lease contract is written by the lessor to provide a 10% rate of return, which is known to the lessee. However, the lessee has an incremental borrowing rate of 12%. Which of the following is true?
The lessee's Lease Obligation is larger than the lessor's Lease Receivable.
The lessee's Lease Obligation is smaller than the lessor's Lease Receivable.
The lessee and the lessor have the same value for the lease.
The lease discount rate is 12% for both the lessee and the lessor.

7 - A lease for an asset with a 20 year productive life is leased for a 10-year noncancellable lease with a renewal at market lease rates for an additional 5 years.
The lease is a capital lease.
The lease is an operating lease, unless another capital lease criterion is met
The lease term is 20 years.
The lease term is 15 years.

8 - A lease for an asset with a 20 year productive life is leased in a noncancellable 10-year lease. The lease can be renewed for $1 per year for an additional 5 years at the option of the lessee. Which of the following is true?
The lease is a capital lease
The lease is an operating lease, unless another capital lease criterion is met.
The lease term is 10 years.
The lease term is 20 years.

9 - A lease for an asset with a 20 year productive life is leased for a 15 year term, cancellable at the end of each year by either party. Which of the following is true?
The lease is a capital lease
The lease is an operating lease, unless another capital lease criterion is met.
The lease term is 15 years.
The lease term is 20 years.

10 - A lease can be a capital lease for the lessor and an operating lease for the lessee:
When the lease term is longer for the lessor than the lessee.
When there are contingent lease payments.
When the lessor uses a higher discount rate than the lessee.
When there is a third party guarantee for residual values of the leased asset.