Question

1. With an operating lease, the leased asset appears on the balance sheet of:

		neither the lessor nor the lessee.
		the lessee.
		the lessor.

2.

With a finance lease, which party recognizes depreciation expense on the leased asset?

		The lessor.
		The lessee.
		Both the lessor and the lessee.

3.

Which of the following statements about depreciation is least accurate?

		For a firm with increasing capital expenditures, accelerated depreciation methods tend to increase both net income and stockholders' equity when compared to straight-line depreciation.
		Return on assets is initially higher using straight-line depreciation than it is using accelerated depreciation.
		If an asset produces a constant stream of net income over its useful life and is depreciated using the straight-line method, the rate of return on the asset increases over its life.

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Answer 1

(1) Operating lease is just like a rent where lease expense is considered operating expense in nature. Risk are rewards to assets still lies with the lessor. Ownership is not transferred in operating lease.

Therefore, the leased asset appears on the balance sheet of lessor

(2) Financial lease is kind of financial arrangement in which risk and rewards of asset are transferred to lessee. It's more like a financial arrangement.

Therefore asset appears in the books of lessee and thus is depreciated by lessor,

Therefore, Lessee recognizes depreciation expense on the leased asset

(3)

For a firm with increasing capital expenditures, accelerated depreciation methods tend to increase both net income and stockholders' equity when compared to straight-line depreciation. This statement is inaccurate since depreciation is higher initially in case of accelerated depreciation method and if the firm has increasing capital expenditures, accelerated depreciation will give a higher depreciation expense and thus lower net income and stockholders' equity.

Return on assets is initially higher using straight-line depreciation than it is using accelerated depreciation. This statement is correct since depreciation in higher initially in case of accelerated depreciation.

If an asset produces a constant stream of net income over its useful life and is depreciated using the straight-line method, the rate of return on the asset increases over its life. This statement is correct since value of asset reduces over time however net income is constant. So returns on asset will increase.

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