D105 Intermediate Accounting III - Set 4 - Part 1

Test your knowledge of technical writing concepts with these practice questions. Each question includes detailed explanations to help you understand the correct answers.

Question 1: What is the Journal Entry for the Lessee's First Lease Payment in an Operating Lease?

Debit Lease Expense, Credit Cash

Debit Lease Liability, Credit Cash

Debit Right-of-Use Asset, Credit Lease Liability

Debit Lease Receivable, Credit Cash

Question 2: What is a Bargain Purchase Option in a Lease?

A lessee's right to purchase the leased asset at a price significantly lower than the asset's fair value

A lessor's option to sell the asset to the lessee at market value

The lessee’s right to cancel the lease early

A guaranteed residual value payment

Question 3: How Should Initial Direct Costs be Accounted for in an Operating Lease?

Capitalize and amortize them over the lease term

Expense them immediately

Include them in the lease liability

Recognize them as lease revenue

Question 4: Which Lease Classification Test Determines if a Lease Transfers Ownership to the Lessee?

Lease Term Test

Purchase Option Test

Transfer of Ownership Test

Present Value Test

Question 5: What is the Lessee's Journal Entry for the Second Lease Payment in a Finance Lease?

Debit Lease Liability, Credit Cash

Debit Lease Expense, Credit Lease Liability

Debit Right-of-Use Asset, Credit Cash

Debit Interest Expense, Credit Lease Liability

Question 6: When is the Present Value Test Used in Lease Classification?

When determining if the lease term is a major part of the asset’s economic life

When calculating the residual value of the leased asset

When assessing whether the present value of lease payments is 90% or more of the asset's fair value

When deciding if the lease transfers ownership to the lessee

Question 7: How Should a Lessor Account for a Finance Lease with Unguaranteed Residual Value?

Exclude it from the lease receivable

Include it in the lease receivable calculation

Record it as unearned revenue

Include it only if the lessee guarantees the amount

Question 8: What is the Journal Entry for Lessee’s Initial Recognition of a Finance Lease?

Debit Right-of-Use Asset, Credit Lease Liability

Debit Lease Expense, Credit Cash

Debit Lease Receivable, Credit Cash

Debit Right-of-Use Asset, Credit Unearned Revenue

Question 9: What is the Purpose of the Alternative Use Test in Lease Classification?

To determine if the asset can be used for alternative purposes at the end of the lease

To assess whether the asset will be transferred to the lessee

To determine if the asset has a residual value

To assess whether the lease payments will exceed the fair value of the asset

Question 10: How is Lease Revenue Recognized by the Lessor in a Sales-Type Lease?

Over the lease term

At the inception of the lease

When lease payments are received

At the end of the lease term

Question 11: What is the Journal Entry for a Lessee’s First Payment in a Finance Lease?

Debit Lease Liability, Credit Cash

Debit Interest Expense, Credit Lease Liability

Debit Right-of-Use Asset, Credit Lease Liability

Debit Lease Receivable, Credit Lease Liability

Question 12: When is the Lease Term Test Used?

To determine if the lease transfers ownership to the lessee

To assess if the lease term is a major part of the asset’s economic life

To calculate the interest rate of the lease

To determine the residual value of the asset

Question 13: What is a Service-Type Warranty?

A warranty that the product meets agreed-upon specifications at the time of sale

A warranty that provides additional services beyond an assurance-type warranty

A warranty that guarantees the performance of the product for its entire life

A warranty that applies only to finance leases

Question 14: How Should a Lessee Account for Prepaid Lease Payments?

Debit Lease Expense, Credit Cash

Debit Right-of-Use Asset, Credit Cash

Debit Lease Liability, Credit Cash

Debit Prepaid Lease Expense, Credit Lease Liability

Question 15: How Does a Lessor Record Lease Revenue in a Finance Lease?

Debit Lease Receivable, Credit Lease Revenue

Debit Cash, Credit Lease Receivable

Debit Unearned Revenue, Credit Lease Revenue

Debit Lease Liability, Credit Cash

Question 16: What is the Purchase Option Test in Lease Classification?

A test to determine if the lessee has a purchase option in the lease agreement

A test to calculate the purchase price of the leased asset

A test to assess whether the purchase option is a bargain purchase option

A test to determine the market value of the leased asset

Question 17: What is the Journal Entry for the Lessor’s Initial Sales-Type Lease?

Debit Lease Receivable, Debit Cost of Goods Sold, Credit Inventory, Credit Sales Revenue

Debit Lease Revenue, Credit Lease Liability

Debit Cash, Credit Lease Receivable

Debit Interest Expense, Credit Lease Receivable

Question 18: How Should a Lessor Account for Lease Receivable in a Sales-Type Lease?

Exclude any unguaranteed residual value from the calculation

Include the guaranteed residual value but exclude unguaranteed residual value

Include both guaranteed and unguaranteed residual value in the calculation

Only include the lease payments in the receivable calculation

Question 19: What is the Effect of Initial Direct Costs on a Right-of-Use Asset?

They reduce the right-of-use asset

They increase the right-of-use asset

They are expensed immediately

They are recorded as a liability

Question 20: When Should the Lessee Include a Guaranteed Residual Value in Lease Liability?

Always

Only when the residual value is greater than the expected fair value

Only when the lease term exceeds 75% of the asset’s life

Never

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