Question

Which of the following statements regarding leases is​ CORRECT?

A. Finance leases lower the debt ratio.

B. A debit balance in the Leased Asset account on the balance sheet indicates an operating lease that is less than one year.

C. Title is transferred to the lessee at the end of an operating lease term.

D. If a lease does not meet one of the five criteria provided by U.S. GAAP​ guidelines, it is classified as an operating lease by default.

Answer 1

Correct Answer is

D) If a lease does not meet one of the Five Criteria Provided by U.S. GAAP guidelines, it is classified as operating lease by default Because Basic Critaria Provided by U.S. GAAP guidelines are as follows :-

• There is an ownership transferred to the lessee at the end of the lease term.
• The Lease Contains a bargain purchase option.
• The lease life is equal to or greater than 75% of the assets's economic life.
• The Present Value (PV) of the Minimum Lease Payments (MLP) is equal to or greater than 90% of the assets fair market value of leased Property.

If none of these conditions are met, then the lease must be classified as an operating lease.

Incorrect

A) Because For a Capital (Finance ) Lease an assets and Liability are includes in the balance sheet. Finance lease is a financing arrangements, a Company must break down its periodic lease Payments into interest Expense based on the Company's interest rate and Depreciation expense , Which is expenses are higher so, net income will be Lower , Retained Earning will be Lower, Which means Equity is Higher. So, debt ratio is affected and Finance lease higher the debt ratio.

(B) A debit balance in the Leased Asset account does not included in the balance sheets indicates an operating lease they are Expenses and they Included in the Income Statement so the net income is calculated.

C) Title is transferred to the lessee at the end of finance lease term. One of the Critaria provided by the U.S. GAAP guidelines.