Bakersfield College

ACG 2021

True/False Questions

1)At the inception of a lease agreement, the company's debt to equity ratio and rate of return on assets are both affected whether the lease is classified as a capital lease or as an operating lease.

2. Capital leases are agreements that are formulated outwardly as leases, but are installment purchases in substance.

3. The criterion of 75% of economic life for classifying a lease as a capital lease is consistent with the basic premise that most of the risks and rewards of ownership occur during the first 75% of an asset's life.

4. In accounting for operating leases, the lessor, rather than the lessee, will recognize depreciation on the leased asset.

5. In addition to the criteria that must be met by the lessee, the lessor must meet additional conditions for classification as a capital lease to satisfy revenue recognition criteria.

6. When accounting for a capital lease, the lessee records the leased asset at the present value of the minimum lease payments or the asset's fair value, whichever is lower.

7. A bargain purchase option is defined as the option of purchasing leased property at a price that is equal to the expected fair value of a leased asset.

8. When the lessee guarantees an estimated residual value of $75,000, the amount the lessee records as a leased asset and lease liability is increased by $75,000.

9. If the lessee is expected to take ownership of a leased asset at the end of the lease term, the lessor must use an estimated residual value when calculating the lease payments necessary to achieve a desired rate of return.

10. On a sale-leaseback transaction, any gain on the "sale" portion of the transaction is recognized immediately.

Multiple Choice Questions

11. GAAP requires that some lease agreements be accounted for as purchases. The theoretical justification for this treatment is that a lease of this type:
    1. Complies with the concept of form over substance.
    2. Reflects the relationship of cause and effect.
    3. Satisfies the concept of historical cost.
    4. Conveys most of the risks and benefits of property ownership.

12. From the perspective of the lessee, leases may be classified as either:
    1. Direct financing or sales-type.
    2. Capital or direct financing.
    3. Capital or operating.
    4. Direct financing or operating.

13. From the perspective of the lessor, leases may be classified as either:
    1. Direct financing or sales-type.
    2. Operating, capital, or direct financing.
    3. Operating, sales-type, indirect financing.
    4. Operating, direct financing, or sales-type.

14. Distinguishing between operating and capital leases is due in large part to the accounting concept of:
    1. Conservatism.

1. 2. Materiality.
   3. Substance over form.
   4. Historical cost.

15. When the total expenses over the life of an operating lease are compared to the total expenses over the life of a capital lease, one will find that:
    1. The expenses of a capital lease are greater than the expenses of the operating lease.
    2. The expenses of the capital lease and operating lease are equal.
    3. The expenses of an operating lease are greater than the expenses of a capital lease.
    4. No meaningful comparison can be made.

16. The four criteria provided in GAAP for distinguishing a capital lease from an operating lease do not include:
    1. The agreement specifies that ownership transfers at the end of the lease term.
    2. The collectibility of the lease payments must be reasonably predictable.
    3. The agreement contains a bargain purchase option.
    4. The noncancelable lease term is 75% or more of the useful life of the leased asset.

17. Of the four criteria for a capital lease, the one that most often is the decisive criteria is:
    1. The 75% of economic life test.
    2. The transfer of title.
    3. The 90% of fair value test.
    4. The bargain purchase option.