D105 Intermediate Accounting III - Set 5 - Part 1

Correct Answer: At the lease commencement date

The right-of-use asset is recorded at the lease commencement date, which is the date the lessor makes the underlying asset available for use by the lessee.

Correct Answer: Lease payments, initial direct costs, and incentives received from the lessor

The right-of-use asset should include lease payments, any initial direct costs incurred by the lessee, and any lease incentives received from the lessor.

Correct Answer: Residual value

Residual value refers to the expected value of the leased asset at the end of the lease term, which the lessee is responsible for returning.

Correct Answer: If the lease is classified as a finance lease

Lease payments under a finance lease are considered financing activities because they represent a repayment of the lease liability.

Correct Answer: Unguaranteed residual value

Unguaranteed residual value is excluded from the lease liability calculation as the lessee has no obligation for it.

Correct Answer: It decreases with each payment made by the lessee

In a finance lease, each lease payment reduces the lease liability, while part of the payment is recognized as interest expense.

Correct Answer: Included in the lease receivable

For the lessor, an unguaranteed residual value is included in the lease receivable as it reflects the amount the lessor expects to recover from the asset at the end of the lease.

Correct Answer: Defined contribution plan

Under a defined contribution plan, employees bear the risk of investment gains and losses, as the employer only contributes a defined amount.

Correct Answer: The employer

In a defined benefit plan, the employer is responsible for ensuring the plan is adequately funded to meet future retirement benefit obligations.

Correct Answer: Mathematical error in revenue recognition

Errors such as mathematical mistakes in financial statements require restatement of prior periods to correct the mistake.

Correct Answer: Deduct from the right-of-use asset

Lease incentives reduce the right-of-use asset, as they effectively lower the lessee’s cost of using the leased asset.

Correct Answer: Cost-to-cost basis

The cost-to-cost basis compares the costs incurred to date with the total estimated costs to complete the contract, reflecting progress toward completion.

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

A finance lease transfers control of the underlying asset to the lessee, either through ownership transfer or by allowing the lessee to consume a substantial portion of the asset.

Correct Answer: Sale of a building

Investing activities include the purchase and sale of long-term assets, such as buildings, equipment, and securities.

Correct Answer: By applying the change prospectively

Changes in accounting estimates are applied prospectively, meaning they only affect the current and future financial statements.

Correct Answer: In the current year’s retained earnings statement

The cumulative effect of a change in accounting principle is typically reported as an adjustment to the beginning balance of retained earnings in the earliest period presented.

Correct Answer: Restate the prior year’s financial statements

Material errors discovered after the issuance of financial statements require restating prior period financial statements to correct the error.

Correct Answer: Overstatement of revenue in one period, corrected in the next

Counterbalancing errors are those that correct themselves over two periods, such as an overstatement of revenue in one period being offset by an understatement in the next.

Correct Answer: Finance lease with a bargain purchase option

If a finance lease contains a bargain purchase option, the lessee is expected to acquire the asset at the end of the lease and can depreciate it over its useful life.

Correct Answer: Straight-line depreciation

Lessees generally use straight-line depreciation for finance leases, spreading the cost of the asset evenly over its useful life or the lease term.