Multiple Choice: Leases Select the correct answer for each of the following.

1. A lease is considered a capital lease if:

a. The lease is less than one year in length.

b. The risks and rewards of ownership are transferred to the lessee.

c. The risks and rewards of ownership remain with the lessor.

d. The lease requires variable payments based on the amount the asset is used each period.

2. Under an operating lease on equipment, the lessee’s annual lease payment is recorded as:

a. An expense.

b. A reduction of the liability for lease payments.

c. An adjustment to the leased equipment account.

d. An adjustment to the accumulated depreciation account.

3. Depreciation expense is recorded by the company (lessee)

that has leased an asset:

a. Under both operating and capital leases.

b. Under operating leases but not under capital leases.

c. Under capital leases but not under operating leases.

d. Only if legal title is transferred to the lessee.

4, Interest expense is recorded under:

a. Operating leases.

b. Capital leases.

c. Both capital and operating leases.

d. Neither capital nor operating leases.