1. A lease must be treated as a capital lease if

1. it contains a bargain purchase option.
2. the lease term is equal to 50% or more of the estimated economic life of the leased property.
3. the present value of the minimum lease payments is equal to 75% or more of the fair value of the leased property to the lessor.
4. any one of these choices apply.

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2. If a lease is classified as an operating lease, the lessor

1. records a receivable.
2. records a sale.
3. keeps the leased asset on its balance sheet.
4. none of these choices.

1. The main disadvantage of leasing for the lessee is that

1. the lease payments are usually more expensive than buying.
2. the lease normally involves 100% financing.
3. a lease increases the risk of obsolescence.
4. none of these choices.

2. Tax advantages of leasing include

1. being able to deduct depreciation expense.
2. being able to write off the full cost of the asset as an expense.
3. no effects on liquidity ratios.
4. none of these choices.

1. Sparrow Company enters into an operating 5-year lease agreement that requires equal payments of $10,000 at the beginning of each year. The journal entry on January 1 will include debit to

1. Rent Expense for $10,000.
2. Prepaid Rent for $10,000.
3. Leased Equipment for $50,000.
4. Capital Lease Obligation for $50,000.

2. The first annual payment on a capital lease will include

1. a debit to Interest Expense.
2. a debit to Capital Lease Obligation.
3. a credit to Cash.
4. all of these choices.

1. If a lessee records a lease as an operating lease, it reports the cash outflow for each lease payment in the

1. operating activities section of the statement of cash flows.
2. financing activities section of the statement of cash flows.
3. investing activities section of the statement of cash flows.
4. other activities section of the statement of cash flows.

2. If a lessee records a lease as a capital lease, it reports the cash outflow of each lease payment that reduces the lease obligation in the

1. operating activities section of the statement of cash flows.
2. financing activities section of the statement of cash flows.
3. investing activities section of the statement of cash flows.
4. other activities section of the statement of cash flows.

1. The initial recording of a sales-type lease by the lessor includes a credit to

1. Sales Revenue.
2. Interest Revenue.
3. Cost of Asset Leased.
4. Lease Receivable.

2. Under an operating lease, substantially all the risks and benefits of ownership are

1. held by the lessor.
2. transferred to the lessee.
3. transferred to a third party.
4. shared equally by the lessor and lessee.

3. With a direct-financing lease, the lease payments received at the beginning of the year by the lessor will be recorded with a credit to

1. Sales Revenue.
2. Interest Revenue: Leases.
3. Cost of Asset Leased.
4. Lease Receivable.

1. If the lessor records a lease as a sales-type lease, it classifies any cash paid to purchase the asset as a cash outflow in the

1. operating activities section of the statement of cash flows.
2. financing activities section of the statement of cash flows.
3. investing activities section of the statement of cash flows.
4. other activities section of the statement of cash flows.

2. If the lessor records a lease as a direct-financing lease, it classifies the portion of each lease receipt that reduces lease receivable as a cash inflow in the

1. operating activities section of the statement of cash flows.
2. financing activities section of the statement of cash flows.
3. investing activities section of the statement of cash flows.
4. other activities section of the statement of cash flows.

1. When an unearned gain on sale-leaseback is recorded on the sale of a leased-back asset, it is subsequently reported in

1. the assets section of the balance sheet.
2. the liabilities section of the balance sheet.
3. the equity section of the balance sheet.
4. no section of the balance sheet.

2. Which of the following criteria applies in determining if a lease of land is a capital lease?

1. It contains a bargain purchase option.
2. The lease term is equal to 75% or more of the estimated economic life of the leased property.
3. The present value of the minimum lease payments is equal to 90% or more of the fair value of the leased property to the lessor.
4. All of these criteria apply.