ACCOUNTING FOR LEASES- THEORIES

1. It is an arrangement whereby one party sells a property to another party and then immediately
lease the property back from its new owner.
a. Sale
b. Leaseback
c. Sale and leaseback
d. Operating lease
2. An entity leased equipment to a lessee under a noncancelable lease with a transfer of title. The
lessor will record which of the following?
a. Depreciation and interest revenue
b. Interest revenue and no depreciation
c. Depreciation and no interest revenue
d. No depreciation and no interest revenue
3. The criteria for a finance lease include all of the following, except
a. Transfer of title of the asset to the lessee at the end of the lease term
b. There is a bargain purchase option that is certain to be exercised
c. The lease term is a minor part of the useful life of the underlying asset
d. The present value of the minimum lease payments is a substantial part of the fair value of the
asset.
4. An entity leased a new machine having an expected useful life of 12 years. The noncancelable
lease term is 10 years. The entity is certain exercise a purchase option at the end of the
noncancelable term. The machine should be capitalized by the entity and depreciated over
a. 9 years
b. 12 years
c. 10 years
d. 10 or 12 years at entity's option.

5. The following are included in computing the present value of lease payments, except
a. Fixed lease payments
b. Termination penalties if lease term reflects exercise of termination option
c. Annual executory costs
d. Any residual value guarantee

6. An entity signed a lease to rent equipment for ten years. At the end of the lease term, the entity
may purchase the equipment for a nominal amount. The equipment is estimated to have a useful
life of 12 years. How should the entity classify this lease?
a. Operating lease
b. Capital lease
c. Finance lease
d. Sales type lease
7. How does a lessor treat broker’s fee under an operating lease?
a. Expensed immediately
b. Income
c. Deferred and amortized as expense over the lease term
d. Capitalized as cost of the leased asset
8. The accounting concept that is principally used to classify leases into operating and finance is
a. Substance over form
b. Prudence
c. Neutrality
d. Completeness
9. Lessors shall recognize asset held under finance lease as a receivable at an amount equal to
a. Gross investment in the lease
b. Net investment in the lease
c. Gross rentals
d. Residual value, whether guaranteed or unguaranteed
10. The classification of a lease is normally carried out at
a. At the end of the lease term
b. After a “cooling off’ period of one year
c. At the inception of the lease
d. When the entity deems it to be necessary