CPA Financial Accounting and Reporting (FAR) : Accounting for Leases
Study concepts, example questions & explanations for CPA Financial Accounting and Reporting (FAR)
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Example Questions
Example Question #1 : Accounting For Leases
Which of the following is not among the criteria that must be met to record a lease as a capital lease?
The lease term is 85% or greater than the life of the asset
The lease contains a bargain purchase option
The present value of the lease payments is 90% or more of the fair value of the leased asset at the inception of the lease
The lease transfers title to the lessee at the expiration of the lease
The lease term is 85% or greater than the life of the asset
To record a lease as a capital lease, at least one of the following criteria must be met: ownership of the asset transfers at the end of the lease term; the lease contains a bargain purchase option; the PV of the lease payments is at least 90% of the FV at inception; and the lease term is at least 75% of the asset's useful life.
Example Question #1 : Expenses
The Global Group leases an asset from Earth Co for 8 years. The life of the asset is expected to be 10 years. If the lease does NOT contain a bargain purchase option or a transfer of title, which of the following is correct?
The leased asset would be accounted for by the Global Group as an operating lease
The leased asset would be depreciated using the same method for book purposes as for tax purposes
The leased asset would be depreciated by the Global Group over 8 years
The leased asset would be depreciated by the Global Group over 10 years
The leased asset would be depreciated by the Global Group over 8 years
In a lease does not contain a bargain purchase option, the asset will be depreciated over the life of the lease, rather than over the useful life of the asset.
Example Question #1 : Accounting For Leases
In Year 3, Meyer Corp sold an asset for $900,000 to Sailer Corp and simultaneously leased it back for 5 years. The assets remaining life was 53 years, and the carrying value on the date of the sale was $640,000. The annual lease payments were $180,000 per year. How much gain should be recognized by Meyer in Year 3?
$260,000
$52,000
$180,000
$36,000
$260,000
The gain recognized will be equal to the purchase price of the asset minus the asset's carrying value on the date of the sale. The full gain will be recognized at the time of the sale.
Example Question #1 : Accounting For Leases
ABC leased equipment to DEF under a noncancellable lease with a transfer of title. Will ABC record depreciation expense on the leased asset and interest revenue related to the lease?
Interest revenue
Neither
Both
Depreciation expense
Interest revenue
DEF will capitalize the lease due to the transfer of title and will incur both depreciation and interest expense.
Example Question #2 : Accounting For Leases
A firm sold its headquarters building at a gain, and simultaneously leased back the building. The lease was reporting as a finance lease under US GAAP. At the time of sale, the sale-leaseback will be considered:
Operating income
A reduction of lease expense
A failed sale
A separate component of stockholder's equity
A failed sale
If the underlying lease in a sale leaseback is a finance lease, it is considered equivalent to a repurchase and will therefore be considered a failed sale.
Example Question #1 : Accounting For Leases
During which period of time should a lessee amortize a leased property? The lease is a finance lease and contains a written option to purchase.
The economic life of the asset
Whichever is the shortest of these options
The lease term
The life of the asset capped at 30 years
The economic life of the asset
When dealing with a financing lease, the lessee should amortized the leased property over the economic life of the asset when there is a written purchase option or at the time the lessee obtains ownership of the asset.
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