Question

1. Which of the following is true?
   1. In a direct financing lease the lessor is a dealer
   2. In a direct financing lease the lessor is a dealer and a financing entity
   3. In a sales type lease the lessor is a financing entity
   4. In a finance lease, the accounting for the lessee is the same whether it is direct finance lease or sales type lease
2. Which of the following not part of the Gross Investment?
   1. Gross Rentals
   2. Absolute Amount of Residual Value
   3. Absolute Amount of Purchase Option
   4. Present Value of Residual Value
3. Unearned Interest Income is?
   1. The Present Value of Gross Investment
   2. The Difference between Initial Direct Cost and Net Investment
   3. Finance Income that is recognized periodically
   4. Same as Gross Profit for Sales Type Lease
4. The Cost of Asset for lease is?
   1. Equal to the Gross Investment
   2. Equal to the Net Investment
   3. Equal to the Unearned Interest Income
   4. Equal to the Gross Rentals
5. Initial direct cost incurred by a lessor in an operating lease should be
   1. Added to the carrying amount of the leased asset and recognized as expense over the lease term on the same basis as lease income
   2. Expense immediately
   3. Capitalized as cost of the leased asset and depreciated over the life of the asset
   4. Capitalized as cost of the leased asset and depreciated over the lease term
6. Lease payments under an operating lease shall be recognized as expense using the
   1. Cash Method
   2. Sum of the year’s digit method
   3. Declining balance method
   4. Straight line method, unless another systematic basis representative of the time pattern of the user’s benefit
7. If entities want to disqualify a lease as a finance lease to the lessee, while having the same lease qualify as a finance lease to the lessor, which of the following statements is true?
   1. This cannot be done
   2. The entities must make information about the implicit rate unavailable to the lessee and use the incremental borrowing rate of the lease when it is higher than the implicit interest rate of the lessor
   3. The entities include a bargain purchase option
   4. The entities specify the transfer of the property to the lessee
8. Which of the following statement is incorrect about initial direct cost?
   1. Initial direct costs incurred by the lessee in finance lease are added to the amount recognized as an asset and to the finance lease liability
   2. In a direct financing lease, initial direct costs are added to the net investment in the lease
   3. In a sales type lease, initial direct costs are expensed in the year of incurrence
   4. For operating leases, initial direct costs are deferred and allocated over the lease term

Answer 1

Answer to 1st question

In a direct financing lease, lessor is not dealer. So, Option a and b is not true.
In a sales type finance lease, lessor is a dealer. So, Option c is not true.
In the books of lessee, the account for lease is same in case of finance lease if it is direct financing or sale type. So, Option d is true.

Hence, the correct answer is Option d.

Answer to 2nd question

The absolute value of residual value shall form part of gross investment and not its present value.

Hence, the correct answer is Option d.

Answer to 3rd Question

Unearned interest income is the finance income that is recognized periodically.

Hence, the correct answer is Option c.

Answer to 4th question

The cost of the asset for the lease is equal to the net investment.

Hence, the correct answer is Option b.

Answer to 5th question

Initial direct cost incurred by a lessor in an operating lease should be expensed immediately.

Hence, the correct answer is Option b.

Answer to 6th question

Lease payments under an operating lease shall be recognized as expense using the Straight line method, unless another systematic basis representative of the time pattern of the user’s benefit.

Hence, the correct answer is Option d.

Answer to 7th question

If entities want to disqualify a lease as a finance lease to the lessee, while having the same lease qualify as a finance lease to the lessor, The entities must make information about the implicit rate unavailable to the lessee and use the incremental borrowing rate of the lease when it is higher than the implicit interest rate of the lessor.

Hence, the correct answer is Option b.

Answer to 8th question

For operating leases, initial direct costs are expensed immediately. So, this statement is not true.

Hence, the correct answer is Option d.