Multiple choice 21. GAAP requires that some lease agreements be accounted for as
ID: 2546912 • Letter: M
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Multiple choice 21. GAAP requires that some lease agreements be accounted for as purchases of assets. The theoretical justification for this treatment is that a lease of this type: A) Complies with the concept of form over substance B) Reflects the relationship of cause and effect. C) Satisfies the concept of historical cost. D) Conveys most of the benefits of property ownership. 22. For the lessee to account for a lease as a finance lease, the lease must meet: A) All five of the criteria specified by GAAP regarding accounting for leases. B) Any one of the six criteria specified by GAAP regarding accounting for leases. C) Any two of the criteria specified by GAAP regarding accounting for leases. D) Any one of the five criteria specified by GAAP regarding accounting for leases. Use the information below to answer the following questions. Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2018. The manufacturing cost of the computers was $12 million. This noncancelable lease had the following terms: Lease payments: $2,466,754 semiannually; first payment at January 1, 2018; Remaining payments at June 30 and December 31 each year through June 30, 2022. Lease term: five years (10 semiannual payments) . . No residual value; no purchase option. . Economic life of equipment: five years . Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually Fair value of the computers at January 1,2018: S20 million. 23 Technoid would account for this as: A) A finance lease. B) A sales-type lease without selling profit. C) A sales-type lease with selling profit. D) An operating lease. 24. Lone Star Company would account for this as: A) A finance lease. B) A sales type lease without selling profit. C) A sales type lease with selling profit. D) An operating lease. 25. When the total expenses over the life of an operating lease are compared to the total expenses over the life of a finance lease, one will find that: A) The expenses of a finance lease are greater than the expenses of the operating lease. B) The expenses of the finance lease and operating lease are equal. expenses of an operating lease are greater than the expenses of a finance lease. D) No meaningful comparison can be madeExplanation / Answer
21. D. Conveys most of the benefits of the property ownership.
22. D. Any one of the five creteria specified by GAAP regarding accounting for leases.
23. A. a finance lease.
lease period is equal to the estimated life of the equipment thus it fulfil one creteria of the GAAP requirement that lease term is greater then or equal to 75% of estimated life of the assets.
24. A. a finance lease.
25. B. The expenses of the Finance lease and operating lease are equal.
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