CHAPTER 20
ACCOUNTING FOR LEASES
CHAPTER LEARNING OBJECTIVES
1. Describe the environment related to leasing transactions.
2. Explain the accounting for finance leases.
3. Explain the accounting for operating leases.
4. Discuss the accounting and reporting for special features of lease arrangements.
*5. Describe the lessee’s accounting for sale-leaseback transactions.
*6. Describe the lessor’s accounting for a direct financing lease.
,20 - 2 Test Bank for Intermediate Accounting, Eighteenth Edition
TRUE-FALSE—Conceptual
1. Leasing equipment reduces the risk of obsolescence to the lessee and in many cases
passes the risk of residual value to the lessor.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
2. The FASB agrees with the capitalization approach and requires companies to capitalize
all long-term leases.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
3. A benefit of leasing to the lessor is the return of the leased property at the end of the lease
term.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
4. Minimum rental payments are the same as the lease payments.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
5. If a lease does not transfer control of the asset over the lease term, the lessor will
generally account for the lease as a sales-type lease.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and InterpretationAICPA PC:
Problem Solving, IMA: Reporting, IFRS: None
6. A leased asset is always depreciated over the term of the lease by the lessee.
Ans: F, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
7. A lessee reports interest expense in both a finance lease and an operating lease.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
8. In an operating lease, the lessee reports both interest expense and amortization expense
on the income statement.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
9. Under an operating lease, the lessor records each rental receipt as part interest revenue
and part rental revenue.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
10. In computing the annual lease payments, the lessor deducts only a guaranteed residual
value from the fair value of a leased asset.
Ans: F, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
11. If it is probable that the expected residual value is less than the guaranteed residual value,
the difference should be included in the computation of the lease liability.
Ans: T, LO: 4, Bloom: K, Difficulty: Difficult, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
, Accounting for Leases 20 - 3
12. Both a guaranteed and an unguaranteed residual value affect the lessee’s computation of
amounts capitalized as a leased asset.
Ans: F, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
13. When a lease has an unguaranteed residual value, the lessor reduces sales revenue and
cost of goods sold by the present value of the unguaranteed residual value.
Ans: T, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
14. If a lease includes a bargain purchase option, the lessee must increase the present value
of the lease payments by the purchase option price.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
15. Executory costs should always be excluded by the lessee in computing the present value
of the lease payments.
Ans: F, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
16. The gross profit amount in a sales-type lease is greater when a guaranteed residual value
exists.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
17. For operating leases, a lessor defers the initial direct costs and amortizes them as
expenses over the term of the lease.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
18. In a sale-leaseback arrangement, the seller-lessee transfers an asset to the buyer-lessor
and then leases the asset back from the buyer-lessor.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, FSA, IFRS: None
19. The basic difference between a direct-financing lease and a sales-type lease relates to
the recognition of the profit on the sale.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
20. Direct financing leases involve a third party in addition to the lessee.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
, 20 - 4 Test Bank for Intermediate Accounting, Eighteenth Edition
MULTIPLE CHOICE—Conceptual
21. Which of the following are reasons why a company is involved in leasing to other
companies?
I. Interest revenue
II. High residual values
III. Tax incentives
IV. Guaranteed bargain purchase options
a. I, II, and IV.
b. II, III, and IV.
c. I, III, and IV.
d. I, II, and III.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
22. If a lease transfers control (or ownership) of the underlying asset to the lessee, then the
lease is classified as a(n):
a. operating lease.
b. operating or financing lease.
c. leveraged lease.
d. financing lease.
Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Reflective, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation,
AICPA PC: Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
23. Which of the following best describes current practice in accounting for leases?
a. Leases are not capitalized.
b. All long-term leases are capitalized.
c. Leases similar to installment purchases are capitalized.
d. All leases are capitalized.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
24. While only certain leases are currently accounted for as a sale or purchase, there is
theoretical justification for considering all leases to be sales or purchases. The principal
reason that supports this idea is that
a. 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.
b. at the end of the lease the property usually can be purchased by the lessee.
c. a lease reflects the purchase or sale of a quantifiable right to the use of property.
d. during the life of the lease the lessee can effectively treat the property as if it were
owned.
Ans: C, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA
PC: Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
S
25. What impact does a bargain purchase option have on the present value of the lease
payments computed by the lessee?
a. There is no impact as the option does not enter into the transaction until the end of the
lease term.
b. The lessee must increase the present value of the lease payments by the present
value of the option price.
c. The lessee must decrease the present value of the lease payments by the present
value of the option price.
d. The lease payments would be increased by the option price.
Ans: B, LO: 1, Bloom: C, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA
PC: Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
ACCOUNTING FOR LEASES
CHAPTER LEARNING OBJECTIVES
1. Describe the environment related to leasing transactions.
2. Explain the accounting for finance leases.
3. Explain the accounting for operating leases.
4. Discuss the accounting and reporting for special features of lease arrangements.
*5. Describe the lessee’s accounting for sale-leaseback transactions.
*6. Describe the lessor’s accounting for a direct financing lease.
,20 - 2 Test Bank for Intermediate Accounting, Eighteenth Edition
TRUE-FALSE—Conceptual
1. Leasing equipment reduces the risk of obsolescence to the lessee and in many cases
passes the risk of residual value to the lessor.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
2. The FASB agrees with the capitalization approach and requires companies to capitalize
all long-term leases.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
3. A benefit of leasing to the lessor is the return of the leased property at the end of the lease
term.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
4. Minimum rental payments are the same as the lease payments.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
5. If a lease does not transfer control of the asset over the lease term, the lessor will
generally account for the lease as a sales-type lease.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and InterpretationAICPA PC:
Problem Solving, IMA: Reporting, IFRS: None
6. A leased asset is always depreciated over the term of the lease by the lessee.
Ans: F, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
7. A lessee reports interest expense in both a finance lease and an operating lease.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
8. In an operating lease, the lessee reports both interest expense and amortization expense
on the income statement.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
9. Under an operating lease, the lessor records each rental receipt as part interest revenue
and part rental revenue.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
10. In computing the annual lease payments, the lessor deducts only a guaranteed residual
value from the fair value of a leased asset.
Ans: F, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
11. If it is probable that the expected residual value is less than the guaranteed residual value,
the difference should be included in the computation of the lease liability.
Ans: T, LO: 4, Bloom: K, Difficulty: Difficult, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
, Accounting for Leases 20 - 3
12. Both a guaranteed and an unguaranteed residual value affect the lessee’s computation of
amounts capitalized as a leased asset.
Ans: F, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
13. When a lease has an unguaranteed residual value, the lessor reduces sales revenue and
cost of goods sold by the present value of the unguaranteed residual value.
Ans: T, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
14. If a lease includes a bargain purchase option, the lessee must increase the present value
of the lease payments by the purchase option price.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
15. Executory costs should always be excluded by the lessee in computing the present value
of the lease payments.
Ans: F, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
16. The gross profit amount in a sales-type lease is greater when a guaranteed residual value
exists.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
17. For operating leases, a lessor defers the initial direct costs and amortizes them as
expenses over the term of the lease.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
18. In a sale-leaseback arrangement, the seller-lessee transfers an asset to the buyer-lessor
and then leases the asset back from the buyer-lessor.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, FSA, IFRS: None
19. The basic difference between a direct-financing lease and a sales-type lease relates to
the recognition of the profit on the sale.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
20. Direct financing leases involve a third party in addition to the lessee.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
, 20 - 4 Test Bank for Intermediate Accounting, Eighteenth Edition
MULTIPLE CHOICE—Conceptual
21. Which of the following are reasons why a company is involved in leasing to other
companies?
I. Interest revenue
II. High residual values
III. Tax incentives
IV. Guaranteed bargain purchase options
a. I, II, and IV.
b. II, III, and IV.
c. I, III, and IV.
d. I, II, and III.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
22. If a lease transfers control (or ownership) of the underlying asset to the lessee, then the
lease is classified as a(n):
a. operating lease.
b. operating or financing lease.
c. leveraged lease.
d. financing lease.
Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Reflective, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation,
AICPA PC: Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
23. Which of the following best describes current practice in accounting for leases?
a. Leases are not capitalized.
b. All long-term leases are capitalized.
c. Leases similar to installment purchases are capitalized.
d. All leases are capitalized.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA PC:
Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
24. While only certain leases are currently accounted for as a sale or purchase, there is
theoretical justification for considering all leases to be sales or purchases. The principal
reason that supports this idea is that
a. 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.
b. at the end of the lease the property usually can be purchased by the lessee.
c. a lease reflects the purchase or sale of a quantifiable right to the use of property.
d. during the life of the lease the lessee can effectively treat the property as if it were
owned.
Ans: C, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA
PC: Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
S
25. What impact does a bargain purchase option have on the present value of the lease
payments computed by the lessee?
a. There is no impact as the option does not enter into the transaction until the end of the
lease term.
b. The lessee must increase the present value of the lease payments by the present
value of the option price.
c. The lessee must decrease the present value of the lease payments by the present
value of the option price.
d. The lease payments would be increased by the option price.
Ans: B, LO: 1, Bloom: C, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement, Analysis and Interpretation, AICPA
PC: Problem Solving, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
