D105 Intermediate Accounting III - Set 3 - Part 1

Correct Answer: A lease that transfers control of the underlying asset to the lessee

A Finance Lease transfers control (ownership) of the underlying asset to the lessee, and the lessee recognizes interest expense on the lease liability and amortization of the right-of-use asset.

Correct Answer: A method used to calculate interest expense on a lease liability over time

The Effective Interest Method is used to calculate the interest expense on the lease liability, spreading the cost over the life of the lease in a way that reflects the cost of borrowing.

Correct Answer: A test to see if the lessee has a purchase option at the end of the lease for a price significantly below market value

The Purchase Option Test helps determine if a lease qualifies as a finance lease by evaluating if the lessee can purchase the asset at a bargain price.

Correct Answer: An option allowing the lessee to purchase the leased asset for a price lower than its fair market value

A Bargain Purchase Option (BPO) allows the lessee to purchase the leased asset for a significantly lower price than its market value, typically at the end of the lease.

Correct Answer: A test to determine whether a lease term is for a significant portion of the asset's economic life

The Lease Term Test determines if the lease term represents a major part (usually 75% or more) of the asset's economic life, classifying the lease as a finance lease.

Correct Answer: Payments that remain constant throughout the lease term

Fixed Payments in a lease are the agreed-upon payments that remain the same throughout the duration of the lease, providing stability in lease costs.

Correct Answer: The interest rate a lessee would have to pay to borrow funds to buy the leased asset

The Incremental Borrowing Rate is the rate of interest that a lessee would have to pay if they borrowed funds to purchase the asset, used when the implicit interest rate in the lease is unknown.

Correct Answer: A lease that involves the lessor effectively selling the asset to the lessee

A Sales-Type Lease is a finance lease where the lessor transfers control of the asset to the lessee and records the transaction as a sale, recognizing any gain or loss.

Correct Answer: A lease where the lessee uses the asset but does not obtain ownership

An Operating Lease allows the lessee to use the asset for a specified period without transferring ownership. The lessor retains ownership and continues to report the asset on their balance sheet.

Correct Answer: Include the residual value when measuring lease liability if it is expected to be less than the guaranteed amount

A lessee includes the guaranteed residual value in the lease liability calculation if the asset's expected value at the end of the lease is less than the guaranteed amount.

Correct Answer: The asset representing the lessee’s right to use the leased property during the lease term

The Right-of-Use Asset is recorded by the lessee, representing their right to use the underlying asset over the lease term, and is amortized during the lease period.

Correct Answer: Debit Lease Liability, Credit Cash

In an operating lease, the lessee records the initial payment by debiting the lease liability and crediting cash for the amount of the payment.

Correct Answer: The amount the lessor expects to receive from lease payments and residual value

The Lease Receivable is recorded by the lessor and includes the present value of future lease payments and the present value of any guaranteed or unguaranteed residual value.

Correct Answer: Included in the lease receivable calculation

A lessor includes the guaranteed residual value in the lease receivable when calculating the present value of lease payments to be collected.

Correct Answer: Debit Lease Receivable, Credit Interest Revenue

At year-end, the lessor debits Lease Receivable and credits Interest Revenue to record the accrued interest on a sales-type lease.

Correct Answer: At the end of each reporting period

For an operating lease, the lessee records lease expense periodically, typically at the end of each reporting period, based on the lease payment schedule.

Correct Answer: Debit Amortization Expense, Credit Right-of-Use Asset

In a finance lease, the lessee records amortization by debiting Amortization Expense and crediting the Right-of-Use Asset for the amount of the amortization.

Correct Answer: To calculate the interest expense on the lease liability

The Incremental Borrowing Rate is used by the lessee to calculate the interest expense on the lease liability when the implicit rate of the lease is unknown.

Correct Answer: A lease payment that changes based on the index or rate

Variable Lease Payments are payments that fluctuate during the lease term, typically based on changes in an index or rate (e.g., inflation index).

Correct Answer: If the lessee has the option to purchase the leased asset at a bargain price

The Purchase Option Test determines if the lessee has the option to buy the asset at a price significantly below its fair value, helping to classify the lease as finance or operating.