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20 and 21 Conceptual

Question 1 of 118

1

A pension plan is contributory when the employer makes payments to a funding agency.

Select one of the following:

  • True
  • False

Explanation

Question 2 of 118

1

Qualified pension plans permit deductibility of the employer’s contributions to the pension fund.

Select one of the following:

  • True
  • False

Explanation

Question 3 of 118

1

An employer does not have to report a liability on its balance sheet in a defined-benefit plan.

Select one of the following:

  • True
  • False

Explanation

Question 4 of 118

1

Employers are at risk with defined-benefit plans because they must contribute enough to meet the cost of benefits that the plan defines.

Select one of the following:

  • True
  • False

Explanation

Question 5 of 118

1

Companies compute the vested benefit obligation using only vested benefits, at current salary levels.

Select one of the following:

  • True
  • False

Explanation

Question 6 of 118

1

The accumulated benefit obligation bases the deferred compensation amount on both vested and nonvested service using future salary levels.

Select one of the following:

  • True
  • False

Explanation

Question 7 of 118

1

Service cost is the expense caused by the increase in the accumulated benefit obligation because of employees’ service during the current year.

Select one of the following:

  • True
  • False

Explanation

Question 8 of 118

1

The interest component of pension expense in the current period is computed by multiplying the settlement rate by the beginning balance of the projected benefit obligation.

Select one of the following:

  • True
  • False

Explanation

Question 9 of 118

1

Companies recognize the accumulated benefit obligation in their accounts and in their financial statements.

Select one of the following:

  • True
  • False

Explanation

Question 10 of 118

1

The Pension Asset / Liability account balance equals the difference between the projected benefit obligation and the fair value of pension plan assets.

Select one of the following:

  • True
  • False

Explanation

Question 11 of 118

1

Companies should recognize the entire increase in projected benefit obligation due to a plan initiation or amendment as pension expense in the year of amendment.

Select one of the following:

  • True
  • False

Explanation

Question 12 of 118

1

The FASB makes it mandatory to use only the years-of-service method for amortization of prior service cost.

Select one of the following:

  • True
  • False

Explanation

Question 13 of 118

1

The difference between the expected return and the actual return is referred to as the unexpected gain or loss.

Select one of the following:

  • True
  • False

Explanation

Question 14 of 118

1

The unexpected gains and losses from changes in the projected benefit obligation are called asset gains and losses.

Select one of the following:

  • True
  • False

Explanation

Question 15 of 118

1

The Accumulated Other Comprehensive Income (G/L) account is amortized only if it exceeds 10 percent of the larger of the beginning balances of the projected benefit obligation or the market-related plan assets value.

Select one of the following:

  • True
  • False

Explanation

Question 16 of 118

1

If the Accumulated Other Comprehensive Income (G/L) account is less than the corridor, the net gains and losses are subject to amortization.

Select one of the following:

  • True
  • False

Explanation

Question 17 of 118

1

When a company amends its defined benefit plan, and recognizes prior service, the projected benefit obligation is increased to recognize this additional liability.

Select one of the following:

  • True
  • False

Explanation

Question 18 of 118

1

Companies report Accumulated Other Comprehensive Income (PSC) as a liability on the balance sheet.

Select one of the following:

  • True
  • False

Explanation

Question 19 of 118

1

Companies must disclose a reconciliation of how the projected benefit obligation and the fair value of plan assets changed during the year either in their financial statements or in the notes.

Select one of the following:

  • True
  • False

Explanation

Question 20 of 118

1

Benefits under a pension plan can include the retiree, the retiree's spouse, and other dependents.

Select one of the following:

  • True
  • False

Explanation

Question 21 of 118

1

In determining the present value of the prospective benefits (often referred to as the projected benefit obligation), which of the following are considered by the actuary?

Select one of the following:

  • Retirement and mortality rate.

  • Interest rates.

  • Benefit provisions of the plan.

  • All of these are considered.

Explanation

Question 22 of 118

1

In a defined-benefit plan, the process of funding refers to

Select one of the following:

  • determining the projected benefit obligation.

  • determining the accumulated benefit obligation.

  • making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims.

  • determining the amount that might be reported for pension expense.

Explanation

Question 23 of 118

1

In all pension plans, the accounting problems include all the following except

Select one of the following:

  • measuring the amount of pension obligation.

  • disclosing the status and effects of the plan in the financial statements.

  • allocating the cost of the plan to the proper periods.

  • determining the level of individual premiums.

Explanation

Question 24 of 118

1

In a defined-contribution plan, a formula is used that

Select one of the following:

  • defines the benefits that the employee will receive at the time of retirement.

  • ensures that pension expense and the cash funding amount will be different.

  • requires an employer to contribute a certain sum each period based on the formula.

  • ensures that employers are at risk to make sure funds are available at retirement.

Explanation

Question 25 of 118

1

In a defined-benefit plan, a formula is used that

Select one of the following:

  • requires that the benefit of gain or the risk of loss from the assets contributed to the pension plan be borne by the employee.

  • defines the benefits that the employee will receive at the time of retirement.

  • requires that pension expense and the cash funding amount be the same.

  • defines the contribution the employer is to make; no promise is made concerning the ultimate benefits to be paid out to the employees.

Explanation

Question 26 of 118

1

Which of the following is not a characteristic of a defined-contribution pension plan?

Select one of the following:

  • The employer's contribution each period is based on a formula.

  • The benefits to be received by employees are determined by an employee’s highest compensation level defined by the terms of the plan.

  • The accounting for a defined-contribution plan is straightforward and uncomplicated.

  • The benefit of gain or the risk of loss from the assets contributed to the pension fund is borne by the employee.

Explanation

Question 27 of 118

1

In accounting for a defined-benefit pension plan

Select one of the following:

  • an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised.

  • the employer's responsibility is simply to make a contribution each year based on the formula established in the plan.

  • the expense recognized each period is equal to the cash contribution.

  • the liability is determined based upon known variables that reflect future salary levels promised to employees.

Explanation

Question 28 of 118

1

Alternative methods exist for the measurement of the pension obligation (liability). Which measure requires the use of future salaries in its computation?

Select one of the following:

  • Vested benefit obligation

  • Accumulated benefit obligation

  • Projected benefit obligation

  • Restructured benefit obligation

Explanation

Question 29 of 118

1

The accumulated benefit obligation measures

Select one of the following:

  • the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels.

  • the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels.

  • the level cost that will be sufficient, together with interest to provide the total benefits at retirement.

  • the shortest possible period for funding to maximize the tax deduction.

Explanation

Question 30 of 118

1

The projected benefit obligation is the measure of pension obligation that

Select one of the following:

  • is required to be used for reporting the service cost component of pension expense.

  • requires pension expense to be determined solely on the basis of the plan formula applied to years of service to date and based on existing salary levels.

  • requires the longest possible period for funding to maximize the tax deduction.

  • is not sanctioned under generally accepted accounting principles for reporting the service cost component of pension expense.

Explanation

Question 31 of 118

1

Differing measures of the pension obligation can be based on

Select one of the following:

  • all years of service—both vested and nonvested—using current salary levels.

  • only the vested benefits using current salary levels.

  • both vested and nonvested service using future salaries.

  • All of these answers are correct.

Explanation

Question 32 of 118

1

Vested benefits

Select one of the following:

  • usually require a certain minimum number of years of service.

  • are those that the employee is entitled to receive even if fired.

  • are not contingent upon additional service under the plan.

  • are defined by all of these answers.

Explanation

Question 33 of 118

1

The relationship between the amount funded and the amount reported for pension expense is as follows:

Select one of the following:

  • pension expense must equal the amount funded.

  • pension expense will be less than the amount funded.

  • pension expense will be more than the amount funded.

  • pension expense may be greater than, equal to, or less than the amount funded.

Explanation

Question 34 of 118

1

The computation of pension expense includes all the following except

Select one of the following:

  • service cost component measured using current salary levels.

  • interest on projected benefit obligation.

  • expected return on plan assets.

  • All of these are included in the computation.

Explanation

Question 35 of 118

1

In computing the service cost component of pension expense, the FASB concluded that

Select one of the following:

  • the accumulated benefit obligation provides a more realistic measure of the pension obligation on a going concern basis.

  • a company should employ an actuarial funding method to report pension expense that best reflects the cost of benefits to employees.

  • the projected benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense.

  • All of these answers are correct.

Explanation

Question 36 of 118

1

The interest on the projected benefit obligation component of pension expense

Select one of the following:

  • reflects the incremental borrowing rate of the employer.

  • reflects the rates at which pension benefits could be effectively settled.

  • is the same as the expected return on plan assets.

  • may be stated implicitly or explicitly when reported.

Explanation

Question 37 of 118

1

One component of pension expense is actual return on plan assets. Plan assets include

Select one of the following:

  • assets that a company holds to earn a reasonable return, generally at minimum risk.

  • plan assets still under the control of the company.

  • only assets reported on the balance sheet of the employer as prepaid pension cost.

  • None of these answers are correct.

Explanation

Question 38 of 118

1

The actual return on plan assets

Select one of the following:

  • is equal to the change in the fair value of the plan assets during the year.

  • includes interest, dividends, and changes in the fair value of the fund assets.

  • is equal to the expected rate of return times the fair value of the plan assets at the beginning of the period.

  • All of these answers are correct.

Explanation

Question 39 of 118

1

In accounting for a pension plan, any difference between the pension cost charged to expense and the payments into the fund should be reported as

Select one of the following:

  • an offset to the liability for prior service cost.

  • pension asset/liability.

  • as other comprehensive income (G/L)

  • as accumulated other comprehensive income (PSC).

Explanation

Question 40 of 118

1

Which of the following items should be included in pension expense calculated by an employer who sponsors a defined-benefit pension plan for its employees?
Amortization of
Fair value prior
of plan assets service cost

Select one of the following:

  • Yes Yes

  • Yes No

  • No Yes

  • No No

Explanation

Question 41 of 118

1

A corporation has a defined-benefit plan. A pension liability will result at the end of the year if the

Select one of the following:

  • projected benefit obligation exceeds the fair value of the plan assets.

  • fair value of the plan assets exceeds the projected benefit obligation.

  • amount of employer contributions exceeds the pension expense.

  • amount of pension expense exceeds the amount of employer contributions.

Explanation

Question 42 of 118

1

When a company adopts a pension plan, prior service costs should be charged to

Select one of the following:

  • accumulated other comprehensive income (PSC).

  • operations of prior periods.

  • Other comprehensive income (PSC).

  • retained earnings.

Explanation

Question 43 of 118

1

When a company amends a pension plan, for accounting purposes, prior service costs should be

Select one of the following:

  • treated as a prior period adjustment because no future periods are benefited.

  • amortized in accordance with procedures used for income tax purposes.

  • recorded in other comprehensive income (PSC).

  • reported as an expense in the period the plan is amended.

Explanation

Question 44 of 118

1

Prior service cost is amortized on a

Select one of the following:

  • straight-line basis over the expected future years of service.

  • years-of-service method or on a straight-line basis over the average remaining service life of active employees.

  • straight-line basis over 15 years.

  • straight-line basis over the average remaining service life of active employees or 15 years, whichever is longer.

Explanation

Question 45 of 118

1

Whenever a defined-benefit plan is amended and credit is given to employees for years of service provided before the date of amendment

Select one of the following:

  • both the accumulated benefit obligation and the projected benefit obligation are usually greater than before.

  • both the accumulated benefit obligation and the projected benefit obligation are usually less than before.

  • the expense and the liability should be recognized at the time of the plan change.

  • the expense should be recognized immediately, but the liability may be deferred until a reasonable basis for its determination has been identified.

Explanation

Question 46 of 118

1

The actuarial gains or losses that result from changes in the projected benefit obligation are called
Asset Liability
Gains & Losses Gains & Losses

Select one of the following:

  • Yes Yes

  • No No

  • Yes No

  • No Yes

Explanation

Question 47 of 118

1

Gains and losses that relate to the computation of pension expense should be

Select one of the following:

  • recorded currently as an adjustment to pension expense in the period incurred.

  • recorded currently and in the future by applying the corridor method which provides the amount to be amortized.

  • amortized over a 15-year period.

  • recorded only if a loss is determined.

Explanation

Question 48 of 118

1

The fair value of pension plan assets is used to determine the corridor and to calculate the expected return on plan assets.
Expected Return
Corridor on Plan Assets

Select one of the following:

  • Yes Yes

  • Yes No

  • No Yes

  • No No

Explanation

Question 49 of 118

1

A pension fund gain or loss that is caused by a plant closing should be

Select one of the following:

  • recognized immediately as a gain or loss on the plant closing.

  • spread over the current year and future years.

  • charged or credited to the current pension expense.

  • recognized as a prior period adjustment.

Explanation

Question 50 of 118

1

A pension liability is reported when

Select one of the following:

  • the projected benefit obligation exceeds the fair value of pension plan assets.

  • the accumulated benefit obligation is less than the fair value of pension plan assets.

  • the pension expense reported for the period is greater than the funding amount for the same period.

  • accumulated other comprehensive income exceeds the fair value of pension plan assets.

Explanation

Question 51 of 118

1

A pension asset is reported when

Select one of the following:

  • the accumulated benefit obligation exceeds the fair value of pension plan assets.

  • the accumulated benefit obligation exceeds the fair value of pension plan assets, but a prior service cost exists.

  • pension plan assets at fair value exceed the accumulated benefit obligation.

  • pension plan assets at fair value exceed the projected benefit obligation.

Explanation

Question 52 of 118

1

Which of the following is true of pension termination?

Select one of the following:

  • Companies can terminate a pension plan whenever they wish to do so.

  • Terminating a pension plan is illegal in U.S.

  • A company must start a new defined benefit plan after it eliminates the old one.

  • FASB requires recognition in earnings of a gain or loss when a pension obligation is settled.

Explanation

Question 53 of 118

1

According to the FASB, recognition of a liability is required when the projected benefit obligation exceeds the fair value of plan assets. Conversely, when the fair value of plan assets exceeds the projected benefit obligation, the Board

Select one of the following:

  • requires recognition of an asset.

  • requires recognition of an asset if the excess fair value of plan assets exceeds the corridor amount.

  • recommends recognition of an asset but does not require such recognition.

  • does not permit recognition of an asset.

Explanation

Question 54 of 118

1

Which of the following disclosures of pension plan information would not normally be required?

Select one of the following:

  • The major components of pension expense

  • The amount of prior service cost changed or credited in previous years.

  • The funded status of the plan and the amounts recognized in the financial statements

  • The rates used in measuring the benefit amounts

Explanation

Question 55 of 118

1

The main purpose of the Pension Benefit Guaranty Corporation is to

Select one of the following:

  • require minimum funding of pensions.

  • require plan administrators to publish a comprehensive description and summary of their plans.

  • administer terminated plans and to impose liens on the employer's assets for certain unfunded pension liabilities.

  • All of these answers are correct.

Explanation

Question 56 of 118

1

Which of the following statements is true about postretirement health care benefits?

Select one of the following:

  • They are generally funded.

  • The benefits are well-defined and level in dollar amount.

  • The beneficiary is the retiree, spouse, and other dependents.

  • The benefit is payable monthly.

Explanation

Question 57 of 118

1

Which of the following disclosures of postretirement benefits would not be required by professional pronouncements?

Select one of the following:

  • Postretirement expense for the period

  • A schedule showing changes in postretirement benefits and plan assets during the year

  • The amount of the EPBO

  • The assumptions and rates used in computing the EPBO and APBO

Explanation

Question 58 of 118

1

Which of the following is true of healthcare benefits?

Select one of the following:

  • Healthcare benefit plans are generally not funded.

  • Healthcare benefits are payable monthly.

  • Variables in healthcare benefits are generally predictable.

  • The benefits are well-defined in healthcare benefits.

Explanation

Question 59 of 118

1

A postretirement asset is computed as the excess of the

Select one of the following:

  • expected postretirement benefit obligation over the fair value of plan assets.

  • accumulated postretirement benefit obligation over the fair value of plan assets.

  • fair value of plan assets over the accumulated postretirement benefit obligation.

  • accumulated postretirement benefit obligation over the fair value of plan assets, but not vice versa.

Explanation

Question 60 of 118

1

Gains or losses can represent changes in

Select one of the following:

  • EPBO or the fair value of pension plan assets.

  • EPBO or the book value of pension plan assets.

  • APBO or the fair value of pension plan assets.

  • APBO or the book value of pension plan assets.

Explanation

Question 61 of 118

1

Which of the following statements about the expected postretirement benefit obligation (EPBO) is not correct?

Select one of the following:

  • The EPBO is an actuarial present value.

  • The EPBO is recorded in the accounts.

  • The EPBO is used in measuring periodic expense.

  • All of these are correct.

Explanation

Question 62 of 118

1

Which of the following statements about the recognition of a prior service cost related to a postretirement obligation is correct?

Select one of the following:

  • The prior service amount is recognized in the income statement in the current period.

  • The prior service cost is recognized in the income statement net of tax.

  • Restatement of previously issued annual financial statements is required.

  • The prior service cost amount affects comprehensive income in the current period.

Explanation

Question 63 of 118

1

Which of the following is recognized in the accounts and in the financial statements?

Select one of the following:

  • Accumulated postretirement benefit obligation

  • Postretirement asset / liability

  • Expected postretirement benefit obligation

  • All of these answers are correct.

Explanation

Question 64 of 118

1

Interest cost included in pension expense recognized for a period by an employer sponsoring a defined-benefit pension plan represents the

Select one of the following:

  • shortage between the expected and actual returns on plan assets.

  • increase in the projected benefit obligation due to the passage of time.

  • increase in the fair value of plan assets due to the passage of time.

  • amortization of the discount on accumulated OCI (PSC).

Explanation

Question 65 of 118

1

Seigel Co. maintains a defined-benefit pension plan for its employees. At each balance sheet date, Yeager should report a pension asset / liability equal to the

Select one of the following:

  • excess of the accumulated benefit obligation over the fair value of the plan assets.

  • projected benefit obligation.

  • accumulated benefit obligation.

  • funded status relative to the projected benefit obligation.

Explanation

Question 66 of 118

1

Ohlman, Inc. maintains a defined-benefit pension plan for its employees. As of December 31, 2015, the market value of the plan assets is less than the accumulated benefit obligation. The projected benefit obligation exceeds the accumulated benefit obligation. In its balance sheet as of December 31, 2015, Ohlman should report a liability in the amount of the

Select one of the following:

  • excess of the projected benefit obligation over the fair value of the plan assets.

  • excess of the accumulated benefit obligation over the fair value of the plan assets.

  • projected benefit obligation.

  • accumulated benefit obligation.

Explanation

Question 67 of 118

1

Leasing equipment reduces the risk of obsolescence to the lessee and in many cases passes the risk of residual value to the lessor.

Select one of the following:

  • True
  • False

Explanation

Question 68 of 118

1

The FASB agrees with the capitalization approach and requires companies to capitalize all long-term leases.

Select one of the following:

  • True
  • False

Explanation

Question 69 of 118

1

Minimum rental payments are the same as minimum lease payments.

Select one of the following:

  • True
  • False

Explanation

Question 70 of 118

1

Executory costs should be excluded by the lessee in computing the present value of the minimum lease payments.

Select one of the following:

  • True
  • False

Explanation

Question 71 of 118

1

A capitalized leased asset is always depreciated over the term of the lease by the lessee.

Select one of the following:

  • True
  • False

Explanation

Question 72 of 118

1

A lessee records interest expense in both a capital lease and an operating lease.

Select one of the following:

  • True
  • False

Explanation

Question 73 of 118

1

A benefit of leasing to the lessor is the return of the leased property at the end of the lease term.

Select one of the following:

  • True
  • False

Explanation

Question 74 of 118

1

The distinction between a direct-financing lease and a sales-type lease is the presence or absence of a transfer of title.

Select one of the following:

  • True
  • False

Explanation

Question 75 of 118

1

Lessors classify and account for all leases that don’t qualify as sales-type leases as operating leases.

Select one of the following:

  • True
  • False

Explanation

Question 76 of 118

1

Direct-financing leases are in substance the financing of an asset purchase by the lessee.

Select one of the following:

  • True
  • False

Explanation

Question 77 of 118

1

Under the operating method, the lessor records each rental receipt as part interest revenue and part rental revenue.

Select one of the following:

  • True
  • False

Explanation

Question 78 of 118

1

In computing the annual lease payments, the lessor deducts only a guaranteed residual value from the fair value of a leased asset.

Select one of the following:

  • True
  • False

Explanation

Question 79 of 118

1

When the lessee agrees to make up any deficiency below a stated amount that the lessor realizes in residual value, that stated amount is the guaranteed residual value.

Select one of the following:

  • True
  • False

Explanation

Question 80 of 118

1

Both a guaranteed and an unguaranteed residual value affect the lessee’s computation of amounts capitalized as a leased asset.

Select one of the following:

  • True
  • False

Explanation

Question 81 of 118

1

From the lessee’s viewpoint, an unguaranteed residual value is the same as no residual value in terms of computing the minimum lease payments.

Select one of the following:

  • True
  • False

Explanation

Question 82 of 118

1

The lessor will recover a greater net investment if the residual value is guaranteed instead of unguaranteed.

Select one of the following:

  • True
  • False

Explanation

Question 83 of 118

1

The primary difference between a direct-financing lease and a sales-type lease is the manufacturer’s or dealer’s gross profit (or loss).

Select one of the following:

  • True
  • False

Explanation

Question 84 of 118

1

The gross profit amount in a sales-type lease is greater when a guaranteed residual value exists.

Select one of the following:

  • True
  • False

Explanation

Question 85 of 118

1

Companies must periodically review the estimated unguaranteed residual value in a sales-type lease.

Select one of the following:

  • True
  • False

Explanation

Question 86 of 118

1

The FASB requires lessees and lessors to disclose certain information about leases in their financial statements or in the notes.

Select one of the following:

  • True
  • False

Explanation

Question 87 of 118

1

Major reasons why a company may become involved in leasing to other companies is (are)

Select one of the following:

  • interest revenue.

  • high residual values.

  • tax incentives.

  • All of these answers are correct.

Explanation

Question 88 of 118

1

Which of the following is an advantage of captive leasing companies over the other players in the leasing market?

Select one of the following:

  • They have access to low-cost funds allowing them to purchase assets at lower cost.

  • They are good at developing innovative contracts that help avoid accounting problems.

  • They provide leasing arrangements for a wider range of products than the parent company’s product line.

  • They have the paint-of-sale advantage in finding leasing customers.

Explanation

Question 89 of 118

1

Which of the following best describes current practice in accounting for leases?

Select one of the following:

  • Leases are not capitalized.

  • Leases similar to installment purchases are capitalized.

  • All long-term leases are capitalized.

  • All leases are capitalized.

Explanation

Question 90 of 118

1

While only certain leases are currently accounted for as a sale or purchase, there is theoretic justification for considering all leases to be sales or purchases. The principal reason that supports this idea is that

Select one of the following:

  • all leases are generally for the economic life of the property and the residual value of the property at the end of the lease is minimal.

  • at the end of the lease the property usually can be purchased by the lessee.

  • a lease reflects the purchase or sale of a quantifiable right to the use of property.

  • during the life of the lease the lessee can effectively treat the property as if it were owned.

Explanation

Question 91 of 118

1

An essential element of a lease is that the

Select one of the following:

  • lessor conveys less than his or her total interest in the property.

  • lessee provides a sinking fund equal to one year’s lease payments.

  • property that is the subject of the lease agreement must be held for sale by the lessor prior to the drafting of the lease agreement.

  • term of the lease is substantially equal to the economic life of the leased property.

Explanation

Question 92 of 118

1

What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee?

Select one of the following:

  • There is no impact as the option does not enter into the transaction until the end of the lease term.

  • The lessee must increase the present value of the minimum lease payments by the present value of the option price.

  • The lessee must decrease the present value of the minimum lease payments by the present value of the option price.

  • The minimum lease payments would be increased by the present value of the option price if, at the time of the lease agreement, it appeared certain that the lessee would exercise the option at the end of the lease and purchase the asset at the option price.

Explanation

Question 93 of 118

1

The amount to be recorded as the cost of an asset under capital lease is equal to the

Select one of the following:

  • present value of the minimum lease payments.

  • present value of the minimum lease payments or the fair value of the asset, whichever is lower.

  • present value of the minimum lease payments plus the present value of any unguaranteed residual value.

  • carrying value of the asset on the lessor’s books.

Explanation

Question 94 of 118

1

The methods of accounting for a lease by the lessee are

Select one of the following:

  • operating and capital lease methods.

  • operating, sales, and capital lease methods.

  • operating and leveraged lease methods.

  • None of these answers are correct.

Explanation

Question 95 of 118

1

Which of the following is a correct statement of one of the capitalization criteria?

Select one of the following:

  • The lease transfers ownership of the property to the lessor.

  • The lease contains a purchase option.

  • The lease term is equal to or more than 75% of the estimated economic life of the leased property.

  • The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property.

Explanation

Question 96 of 118

1

Minimum lease payments may include a

Select one of the following:

  • penalty for failure to renew.

  • bargain purchase option.

  • guaranteed residual value.

  • any of these.

Explanation

Question 97 of 118

1

In computing depreciation of a leased asset, the lessee should subtract

Select one of the following:

  • a guaranteed residual value and depreciate over the term of the lease.

  • an unguaranteed residual value and depreciate over the term of the lease.

  • a guaranteed residual value and depreciate over the life of the asset.

  • an unguaranteed residual value and depreciate over the life of the asset.

Explanation

Question 98 of 118

1

In computing the present value of the minimum lease payments, the lessee should

Select one of the following:

  • use its incremental borrowing rate in all cases.

  • use either its incremental borrowing rate or the implicit rate of the lessor, whichever is higher, assuming that the implicit rate is known to the lessee.

  • use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee.

  • None of these answers are correct.

Explanation

Question 99 of 118

1

In computing the present value of the minimum lease payments, the lessee should

Select one of the following:

  • use its incremental borrowing rate in all cases.

  • use either its incremental borrowing rate or the implicit rate of the lessor, whichever is higher, assuming that the implicit rate is known to the lessee.

  • use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee.

  • None of these answers are correct.

Explanation

Question 100 of 118

1

Lessees prefer to account for their leases as operating lease because:

Select one of the following:

  • it increases their debt to total equity ratio.

  • it decreases the income tax expense.

  • it increases the amount of total assets.

  • it decreases the amount of liability reported.

Explanation

Question 101 of 118

1

From the lessee’s perspective, in the earlier years of a lease, the use of the

Select one of the following:

  • capital method will enable the lessee to report higher income, compared to the operating method.

  • capital method will cause debt to increase, compared to the operating method.

  • operating method will cause income to decrease, compared to the capital method.

  • operating method will cause debt to increase, compared to the capital method.

Explanation

Question 102 of 118

1

A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over the

Select one of the following:

  • asset’s remaining economic life.

  • term of the lease.

  • life of the asset or the term of the lease, whichever is shorter.

  • life of the asset or the term of the lease, whichever is longer.

Explanation

Question 103 of 118

1

Based solely upon the following sets of circumstances indicated below, which set gives rise to a sales-type or direct-financing lease of a lessor?
Transfers Ownership Contains Bargain Collectibility of Lease Any Important
By End Of Lease? Purchase Option? Payments Assured? Uncertainties?

Select one of the following:

  • No Yes Yes No

  • Yes No No No

  • Yes No No Yes

  • No Yes Yes Yes

Explanation

Question 104 of 118

1

Which of the following would not be included in the Lease Receivable account?

Select one of the following:

  • Guaranteed residual value

  • Unguaranteed residual value

  • A bargain purchase option

  • All would be included

Explanation

Question 105 of 118

1

In a lease that is appropriately recorded as a direct-financing lease by the lessor, the unearned income

Select one of the following:

  • should be amortized over the period of the lease using the effective interest method.

  • should be amortized over the period of the lease using the straight-line method.

  • does not arise.

  • should be recognized at the lease’s expiration.

Explanation

Question 106 of 118

1

In order to properly record a direct-financing lease, the lessor needs to know how to calculate the lease receivable. The lease receivable in a direct-financing lease is best defined as

Select one of the following:

  • the amount of funds the lessor has tied up in the asset which is the subject of the direct-financing lease.

  • the difference between the lease payments receivable and the fair value of the leased property.

  • the present value of minimum lease payments.

  • the total book value of the asset less any accumulated depreciation recorded by the lessor prior to the lease agreement.

Explanation

Question 107 of 118

1

If the residual value of a leased asset is guaranteed by a third party

Select one of the following:

  • it is treated by the lessee as no residual value.

  • the third party is also liable for any lease payments not paid by the lessee.

  • the net investment to be recovered by the lessor is reduced.

  • it is treated by the lessee as an additional payment and by the lessor as realized at the end of the lease term.

Explanation

Question 108 of 118

1

When lessors account for residual values related to leased assets, they

Select one of the following:

  • include the residual value because they always assume the residual value will be realized.

  • include the unguaranteed residual value in sales revenue.

  • recognize more gross profit on a sales-type lease with a guaranteed residual value than on a sales-type lease with an unguaranteed residual value.

  • All of the answers are true with regard to lessors and residual values.

Explanation

Question 109 of 118

1

The initial direct costs of leasing

Select one of the following:

  • are generally borne by the lessee.

  • include incremental costs related to internal activities of leasing, and internal costs related to costs paid to external third parties for originating a lease arrangement.

  • are expensed in the period of the sale under a sales-type lease.

  • All of the answers are true with regard to the initial direct costs of leasing.

Explanation

Question 110 of 118

1

The primary difference between a direct-financing lease and a sales-type lease is the

Select one of the following:

  • manner in which rental receipts are recorded as rental income.

  • amount of the depreciation recorded each year by the lessor.

  • recognition of the manufacturer’s or dealer’s profit at (or loss) the inception of the lease.

  • allocation of initial direct costs by the lessor to periods benefited by the lease arrangements.

Explanation

Question 111 of 118

1

A lessor with a sales-type lease involving an unguaranteed residual value available to the lessor at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts?

Select one of the following:

  • The minimum lease payments plus the unguaranteed residual value.

  • The present value of the minimum lease payments.

  • The cost of the asset to the lessor, less the present value of any unguaranteed residual value.

  • The present value of the minimum lease payments plus the present value of the unguaranteed residual value.

Explanation

Question 112 of 118

1

For a sales-type lease,

Select one of the following:

  • the sales price includes the present value of the unguaranteed residual value.

  • the present value of the guaranteed residual value is deducted to determine the cost of goods sold.

  • the gross profit will be the same whether the residual value is guaranteed or unguaranteed.

  • None of these answers are correct.

Explanation

Question 113 of 118

1

Which of the following statements is correct?

Select one of the following:

  • For direct-financing leases, initial direct costs are added to the net investment in the lease.

  • For sales-type leases, initial direct costs are expensed in the year of incurrence.

  • For operating leases, initial direct costs are deferred and allocated over the lease term.

  • All of these answers are correct.

Explanation

Question 114 of 118

1

The Lease Liability account should be disclosed as

Select one of the following:

  • all current liabilities.

  • all noncurrent liabilities.

  • current portions in current liabilities and the remainder in noncurrent liabilities.

  • deferred credits.

Explanation

Question 115 of 118

1

To avoid leased asset capitalization, companies can devise lease agreements that fail to satisfy any of the four leasing criteria. Which of the following is not one of the ways to accomplish this goal?

Select one of the following:

  • Lessee uses a higher interest rate than that used by lessor.

  • Set the lease term at something less than 75% of the estimated useful life of the property.

  • Write in a bargain purchase option.

  • Use a third party to guarantee the asset’s residual value.

Explanation

Question 116 of 118

1

If the lease in a sale-leaseback transaction meets one of the four leasing criteria and is therefore accounted for as a capital lease, who records the asset on its books and which party records interest expense during the lease period?

Party recording the Party recording
asset on its books interest expense

Select one of the following:

  • Seller-lessee Purchaser-lessor

  • Purchaser-lessor Seller-lessee

  • Purchaser-lessor Purchaser-lessor

  • Seller-lessee Seller-lessee

Explanation

Question 117 of 118

1

In a sale-leaseback transaction where none of the four leasing criteria are satisfied, which of the following is false?

Select one of the following:

  • The seller-lessee removes the asset from its books.

  • The purchaser-lessor records a gain.

  • The seller-lessee records the lease as an operating lease.

  • All of the answers are false statements.

Explanation

Question 118 of 118

1

When a company sells property and then leases it back, any gain on the sale should usually be

Select one of the following:

  • recognized in the current year.

  • recognized as a prior period adjustment.

  • recognized at the end of the lease.

  • deferred and recognized as income over the term of the lease.

Explanation

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