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Multiple choice

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1. According to GAAP (the generally accepted accounting principles), some leases must be recorded as a purchase. What is the basis for this treatment?
a. A lease of this type effectively conveys the same benefits and risk to the lessee as it would an owner of the property.
b. The lease must be recorded in accordance with the concept of cause and effect.
c. The lease provides the use of the leased assets to the lessee for a limited period of time.
d. It is an example of form over substance.

2. Which of the following is one of the four general criteria for a capital lease?
a. The present value of the minimum lease payments equals or exceeds 50 percent of the property's fair market value.
b. The present value of the minimum lease payments equals or exceeds 75 percent of the property's fair market value.
c. The present value of the minimum lease payments equals or exceeds 90 percent of the property's fair market value.
d. The present value of the minimum lease payments equals or exceeds the property's fair market value.

3. In an operating lease, how should the monthly rental payments be records?
a. They should be split between interest expense and depreciation expense
b. They should be recorded as rental expense
c. They should be recorded as a reduction in liability for leased assets

4. Which of the following is one of the four for recording a lease as a capital lease?
a. The term of the lease must be equal to or greater than the estimated economic life of the property.
b. The term of the lease must be equal to or greater than 90 percent of the estimated economic life of the property.
c. The term of the lease must equal to or greater than 70 percent of the estimated economic life of the property
d. The term of the lease must be equal to or greater than 50 percent of the estimated economic life of the property

5. If a lease does not contain a bargain purchase option, but is equal to 90 percent of the estimated economic life of the leased property, how should this lease be classified?
a. It is a capital lease
b. It is an operating lease

6. At the inception of a capital lease, how is the leasee's balance sheet affected?
a. The leased asset is decreased and the lease obligation is decreased
b. Cash is increased and the lease obligation is decreased
c. Cash is decreased and the lease obligation is decreased
d. The leased asset is increased and the lease obligation is increased

7. Using the direct method, how is the second lease payment through the final lease payment affected on the lessee's statement of cash flows?
a. 1. In the operating section, the interest portion of a lease payment is recorded as a cash outflow. 2. In the financing section, the principle portion of the lease payments is recorded as cash outflow.
b. 1. In the operation section, the interest portion of a lease payments is recorded as a cash inflow. 2. In the financing section, the principle portion of the lease payments is recorded as a cash inflow.
c. 1. In the operating section, the inertest portion of a lease payment is record as a cash outflow. 2. In the investing section, the principle portion of the payment is recorded as a cash outflow.
d. 1. In the operating section, the interest portion of a lease payment is record as a cash inflow. 2. In the investing section, the principle portion of the payment is recorded as cash outflow.

8. In what instance would you report an obligation that is contingent on the occurrence of a future event as a liability on the balance sheet?
a. If the future event is likely to occur
b. If the occurrence of the future event is at least reasonably possible and the amount is know.
c. If the amount of the obligation can be reasonably estimated
d. If the occurrence of the future event is possible and the amount can be reasonable estimated.

9. When you disclose a contingent loss in a note to financial statement, but not record it as a liability?
a. When the outcome is uncertain
b. When the loss is reasonably possible
c. When the possibility of the loss is remove
d. When the contingency involves pending or threatened litigation

10. In December 2004, Company X was involved in several pending litigations issues.

In the first case, the legal department of the company X thinks it is possible that the company will be found liable and the best estimate of liability in the case is $900,000

In the second case, the legal department has determined that it is reasonably possible that the company will face a liability in the case. Company X is being sued for $1,000,000 in this case, but the amount of liability for the case is not reasonably estimable by Company X's legal department

In the third case, a competitor is using the company for $2,000,000. The legal department thinks the chance of liability in this case is remote.

What amount, if any, should be accrued by a change to income by the Company X in 2005?

a. $3,900,000
b. $1,000,000
c. $900,000
d. $0

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