ACC/563 Week 9 Quiz – Strayer NEW
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Week 9 Quiz 7: Chapters 13 and 14
1. Under the capital method of accounting for leases the excess of aggregate rentals over the cost of leased property should be recognized as revenue of the lessor
a. In increasing amounts during the term of the lease
b. In constant amounts during the term of the lease
c. In decreasing amounts during the term of the lease
d. After the cost of leased property has been fully recovered through rentals
2. When measuring the present value of future rentals to be capitalized as part of the purchase price in a lease that is be accounted for as a purchase, identifiable payments to cover taxes, insurance, and maintenance should be
a. Included in the future rentals to be capitalized
b. Excluded from future rentals to be capitalized
c. Capitalized but at a different discount rate and recorded in a different account than future rental payments
d. Capitalized but at a different discount rate and for a relevant period that tends to be different than that for future rental payments
3. Equal monthly rental payments for a particular lease should be charged to rental expense by the lessee for which of the following?
Capital lease Operating lease
a. Yes No
b. Yes Yes
c. No No
d. No Yes
4. In a lease that is recorded as a sales-type lease by the lessor, the difference between the gross investment in the lease and sum of the present values of the components of the gross investment should be recognized as income
a. In full at the lease’s expiration
b. In full at the lease’s inception
c. Over the period of the lease using the interest method of amortization
d. Over the period of the lease using the straight-line method of amortization
5. For a six-year capital lease, the portion of the minimum lease payment in the third year applicable to the reduction of the obligation should be
a. Less than in the second year
b. More than in the second year
c. The same as in the fourth year
d. More than in the fourth year
6. Based solely upon the following sets of circumstances, indicate below which set gives rise to a sales type or direct financing lease of a lessor:
By end of purchase
a. No Yes
b. Yes No
c. Yes Yes
d. No No
7. Generally accepted accounting principles require that certain lease agreements be accounted for as purchases. The theoretical basis for this treatment is that a lease of this type
a. Effectively conveys all of the benefits and risks incident to the ownership of property
b. Is an example of form over substance
c. Provides the use of the leased asset to the lessee for a limited period of time
d. Must be recorded in accordance with the concept of cause and effect
8. The appropriate valuation of an operating lease on the statement of financial position of a lessee is
b. The absolute sum of the lease payments
c. The present value of the sum of the lease payments discounted at an appropriate rate
d. The market value of the asset at the date of the inception of the lease
9. A six-year-capital lease entered into on December 31, 2008, specified equal minimum annual lease payments due on December 31, 2010. Minimum payment applicable to which of the following increased over the corresponding December 31, 2010, minimum payment?
Interest Expense Liability
a. Yes Yes
b. Yes No
c. No Yes
d. No No
10. Office equipment recorded under a capital lease containing a bargain purchase option should be amortized
a. Over the period of the lease using the interest method of amortization
b. Over the period of the lease using the straight-line method of amortization
c. In a manner consistent with the lessee’s normal depreciation policy for owned assets
d. In a manner consistent with the lessee’s normal depreciation policy for owned assets except that the period of amortization should be the lease term
11. What is the primary accounting issue for lessees?
a. Recording interest expense on the lease obligation.
b. Determining whether the lease meets the 90% of fair value test.
c. Off-balance sheet financing.
d. The measurement of the leased asset under a capital lease.
12. What is the primary accounting issue for lessors?
a. Off-balance sheet financing.
b. Revenue recognition and expense allocation over the lease term.
c. Treating the lease in the same manner as the lessee does.
d. Determining whether the lease is a sales-type lease or a direct financing lease.
13. For the lessor to recognize a lease as a sales-type lease, the following must occur.
a. At least one of the capital lease criteria is met, at least one of the certainty criteria is met, and there is a manufacturer or dealer’s profit.
b. At least one of the capital lease criteria is met, both certainty criteria are met, and there is a manufacturer or dealer’s profit.
c. More than one of the capital lease criteria are met, both certainty criteria are met, and there is a manufacturer or dealer’s profit.
d. Only one of the capital lease criteria is met, both certainty criteria are met, and there is a manufacturer or dealer’s profit.
14. A net operating loss carryover that occurs in a company’s second year of operations
a. May cause a company to report a tax benefit in the current period income statement.
b. Has no effect on income tax expense of the current period because no taxes are paid.
c. Causes a company to report a deferred income tax liability for taxes that are not paid currently.
d. Results in future taxable amounts.
15. For a sales-type lease, the net investment is equal to
a. The present value of the minimum lease payments plus executor costs.
b. The net investment minus unearned income.
c. Sales minus the gross profit recognized on the sale.
d. The present value of the gross investment.
16. When a lease contract does not transfer title to the lessee, there is no bargain purchase option, and the lease term is not at least 75 percent of the estimated useful life of the leased asset.
a. The lessee must classify the lease as an operating lease.
b. The amount of unguaranteed salvage value, if any, determines whether the lease is a capital lease or an operating lease.
c. The interest rate used to determine the present value of the minimum lease payments also determines whether the lease is a capital lease or an operating lease.
d. The lessee must use the greater of the lessor’s rate of return or the lessee’s incremental borrowing rate to determine whether the lease is a capital lease or an operating lease.
17. When does the lessee report executory costs as an expense?
a. When they are spelled out in the lease agreement.
b. Only when they are incurred by the lessee and the lease is classified as a capital lease.
c. When they are incurred by the lessee.
d. Only when they are incurred by the lessee and the lease is classified as an operating lease.
18. If the lessor incurs initial direct cost to bring about the lease, when are those costs expensed in total during the first year of the lease term.
a. When the lease is classified as a sales-type lease.
b. When the lease is classified as a direct financing lease.
c. When the lease is classified as an operating lease.
d. Initial direct costs are always expensed during the first year of the lease term.
19. When a sale and leaseback occurs
a. A gain or loss on the sale of the leased asset is deferred and amortized over the lease term .
b. A gain on sale of the leased asset is deferred and amortized over the lease term.
c. Whether a gain or loss on sale of the leased asset is deferred and amortized over the lease term depends on whether the lease is classified as a capital lease or an operating lease.
d. Both gains and losses are recognized in earnings when the asset is sold.
20. Which of the following would indicate that the lessee should not classify a lease as a capital lease?
a. The fair value of the leased asset is $100,000 and the present value of the minimum lease payments is $95,000.
b. The lease provides for no unguaranteed salvage value.
c. The lessee has the option to purchase the leased asset in 4 years for $2 when the asset’s salvage value is expected to be $20,000.
d. The asset’s useful life is 20 years, a 4 year lease occurs when the asset is 26 years old.
1. List four advantages of leasing over the purchase of property for use by a business.
2. Define the following:
a. Capital lease
b. Operating lease
3. List the four criteria for recording a lease transaction as a capital lease.
4. How is the recorded amount of a lessee capital lease determined?
5. What is the difference between a sales-type and a direct financing type of capital lease?
6. What is a leveraged lease? How do lessees and lessors record leveraged leases?
EXAMPLE TEST QUESTIONS
1. APB Opinion No. 8 set minimum and maximum limits on the annual provision for pension cost. An amount that was always included in the calculation of both the minimum and the maximum limit is
a. Normal cost
b. Amortization of past service cost
c. Interest on unfunded past and prior service costs
d. Retirement benefits paid
2. In accounting for a pension plan, any difference between the pension cost charged to expense and the payments into the fund should be reported as
a. An offset to the liability for prior service cost
b. Accrued or prepaid pension cost
c. An operating expense in this period
d. An accrued actuarial liability
3. Benefits under a pension plan that are not contingent upon an employee’s continuing service are
a. Granted under a plan of defined contribution
b. Based upon terminal funding
c. Actuarially unsound
4. According to SFAS No. 87, “Employer’s Accounting for Pensions,” gains and losses should be
a. Fully allocated to current and future periods
b. Offset against pension expense in the year of occurrence
c. Allocated if any unrecognized gain or loss at the beginning of the year is in excess of 10 percent of the greater of the projected benefit obligation or the market value of the plan assets
d. Disclosed in a note to the financial statements only
5. According to SFAS No. 87, prior service costs should be
a. Charged to retained earnings as a cost relating to the past
b. Amortized over the service period of each employee expected to receive benefits
c. Taken into consideration only by expensing interest on the unfunded amount
d. Recorded in full as a liability at their discounted present value
6. According to SFAS No. 87, which of the following is never recorded as a component of annual pension cost?
a. Amortization of the intangible asset recorded as the offset to the minimum pension liability
b. Amortization of prior service cost
c. Amortization of gains and losses
d. Amortization of the transition amount
7. In determining whether to accrue employee’s compensation for future absences, among the conditions that must be met are that the obligation relates to rights that
a. No No
b. No Yes
c. Yes No
d. Yes Yes
8. The funded status of a defined benefit pension plan is equal to the
a. Vested benefit obligation minus the fair value of the pension plan assets.
b. Accumulated benefit obligation minus the fair value of the pension plan assets.
c. Projected benefit obligation minus the fair value of the pension plan assets.
d. Projected benefits plus the fair value of the pension plan assets minus employer contributions to the pension plan.
9. If the projected benefit obligation of a defined benefit pension plan exceeds the fair value of the pension plan assets, the employer must report
a. The difference as a liability in the balance sheet and a corresponding adjustment to the amount of pension expense reported in earnings.
b. The difference as a liability in the balance sheet and a corresponding adjustment to other comprehensive income, net of deferred income taxes .
c. The difference as an asset in the balance sheet and a corresponding adjustment to the amount of pension expense reported in earnings.
d. The difference as an asset in the balance sheet and a corresponding adjustment to other comprehensive income, net of deferred income taxes.
10. The funded status of a defined benefit pension plan is reported in the balance sheet.
a. As an asset, if the pension plan is underfunded.
b. As a liability, if the pension plan is underfunded.
c. Because it measures the minimum pension plan liability.
d. When it exceeds the projected benefit obligation.
11. Some theorists argue that the best measure of the employer’s defined benefit pension plan obligation is the accumulated benefit obligation.
a. Since the accumulated benefit obligation is measured using current salaries, it represents the conservative floor for a company’s pension obligation to its employees.
b. It is consistent with the measurement of pension expense.
c. Since the accumulated benefit obligation is measured using future salaries, it represents the conservative floor for a company’s pension obligation to its employees.
d. The accumulated benefit obligation measures the present value of the amounts that employees will receive from the pension plan once they retire.
12. benefits that are not contingent on the employee continuing in the service of the company are
a. Accumulated benefits.
b. Projected benefits.
c. Benefits earned to date.
d. Vested benefits.
13. The corridor approach
a. Is used to determine how much interest to add to the service cost and amortization of prior service in order to calculate pension expense for the period.
b. Is used to determine the minimum amount of accumulated unamortized net gains or losses that must be amortized during the accounting period.
c. Is used to determine the amount of prior service cost to expense each accounting period.
d. Is use to determine the pension plan’s funded status.
14. What effect did the requirement to replace the minimum liability requirement with the funded status of a pension plan have for underfunded pension plans?
a. Return on assets decreased.
b. There was no effect on return on assets.
c. The debt-to-Equity ratios increased.
d. Working capital increased.
15. What effect did the requirement to replace the minimum liability requirement with the funded status of a pension plan have for overfunded pension plans?.
a. Return on assets decreased.
b. There was no effect on return on assets.
c. The debt-to-Equity ratios increased.
a. Return on common stockholders’ equity increased.
16. Which of the following is not a difference between defined benefit pension plans and other postretirement benefits (ORBS)
a. Unlike defined benefit pension plan payments, there is no cap on the amount of OORB benefit to be paid to participants .
b. Unlike defined benefit pension plans, management promises OORB payments in exchange for current services.
c. Unlike defined benefit pension plans, employees do not accumulate additional OORB benefits with each year of service.
d. Unlike defined benefit pension plans, OORBs do not vest.
17. The expected postretirement benefit obligation (EPBO) is
a. Similar to the defined benefit pension plan’s projected benefit obligation because it is the obligation attributable to employee service rendered to date.
b. Used to calculate the interest component of OORB expense before full eligibility is achieved.
c. Recognized over the life expectancy of the employees when most participants are fully eligible to receive benefits.
d. The actuarial present value of the total benefits expected to be paid assuming full eligibility is achieved.
1. Discuss the difference between defined benefit and defined contribution pension plans.
2. Discuss the cost approach and benefits approach actuarial funding methods.
3. Define the following components of pension cost: under SFAS No. 87 (FASB ASC 715):
a. Service cost
b. Interest cost
c. Return on plan assets
d. Amortization of unrecognized prior service cost
e. Amortization of gains and losses
4. What four categories of information are required to be disclosed under the provisions of SFAS No. 35 (FASB ASC 960)?
5. Discuss the characteristics that make accounting for other postretirement benefits more difficult than accounting for pensions.
6. What changes in accounting for pensions were required by SFAS No. 158 (FASB ASC 715)?