Which statement is correct in comparing capital leases to operating leases? a) A capital lease will have a higher asset turnover compared to an operating lease. b) A capital lease will increase the return on total assets compared to an operating lease. c) A capital lease will have a lower debt-to-equity ratio compared to an operating lease. d) A capital lease will have a higher debt-to-equity ratio compared to an operating lease.

Which statement is correct in comparing capital leases to operating leases? a) A capital lease will have a higher asset turnover compared to an operating lease. b) A capital lease will increase the return on total assets compared to an operating lease. c) A capital lease will have a lower debt-to-equity ratio compared to an operating lease. d) A capital lease will have a higher debt-to-equity ratio compared to an operating lease.

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter7: Financial Activities

Section: Chapter Questions

Problem 1CIC

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1. Which statement is incorrect about initial direct costs? a. Initial direct costs incurred by the lessee in finance lase are added to the amount recognized as an asset and to the finance lease liability. b. In a direct financing lease, initial direct costs are added to the net investment in the lease. c. In a sales type lease, initial direct costs are expensed as component of cost of goods sold. d. For operating leases, initial direct costs are deferred and allocated over the lease term. 2. If the lessor and lessee use different interest rates to account for a finance lease, then a. The lessor will use different account titles to record the leasing transactions b. Total expenses and revenues will be equal c. Total expenses and revenues will be different d. The lessee and the lessor cannot use different interest rates 3. In the case of a lease of land and building where title to the land is not transferred, the lease is generally treated as if: a. Both land and building are finance…
4. Initial direct costs incurred by the lessor in connection with specific leasing activities as in negotiating and securing leasing arrangements in a direct finance lease would a. result to an increase of the implicit interest rate. b. result to a decrease of the implicit interest rate. c. result to either an increase or a decrease of the implicit interest rate depending on the given facts. d. be ignored if the lease qualifies as a dealer's lease.
The following statements relate to the impact on the financial statements for operating vs. finance leases. Indicate all statements that are correct. Select one or more: a. Net Income is higher at first when a lease is classified as a finance lease. b. The right of use asset is shown at a higher amount for a finance lease. c. Operating Income is lower when a lease is classified as an operating lease. d. The lease liability is measured as the present value of future cash flows for both operating and finance leases. PreviousSave AnswersNext
A key difference between a capital lease and an operating lease is that with a capital lease, the lease payments provide the lessor with a return of the funds invested in the asset plus a return on the invested funds, whereas with an operating lease the lessor depends on the residual value to realize a full return of and on the investment. True or false explain
Which of the following statements is characteristic of leases? a.If a lease is classified as an operating lease, the lessee records an asset on its statement of financial position. b.Lease agreements are not a popular form of financing the purchase of assets because leases require a large initial outlay of cash. c.If a lessor classifies a lease as a finance lease, the lessor records a lease liability on its statement of earnings. d.Accounting recognizes two types of leases—operating and finance.
When both the gross investment and cost of the leased asset is equal for both direct and sales-type finance lease with the sales-type finance lease resulting to a gross profit, which of the two would have a lower implicit interest rate on the lease? A)Cannot be determined B)Direct Finance Lease C)Equal for both D)Sales-Type Lease
Net investment in a sales-type lease is equal to A)the minimum lease payments less unguaranteed residual value B)the minimum lease payments C)Gross investment less unearned financing revenue D)Cost of the leased asset
Which of the following is not included in the lease payments for the purpose of computing the lease liability? A. Fixed payments less any lease incentives receivable B. Variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date C. Guaranteed residual value D. Contingent rent based on level of sales
Which of the following statements is true about initial direct costs? A. Initial direct costs of a sales-type lease should be expensed at the commencement of the lease only if no selling profit or loss has been incurred. B. Initial direct costs are ownership-type costs such as insurance, maintenance, and taxes. C. Initial direct costs of an operating lease should be recorded by the lessor as a prepaid asset. D. Initial direct costs should always be debited against income by the lessor in the period of the inception of the lease.
We classify a lease as a finance lease if: Multiple Choice the present value of lease payments is less than the asset's book value. the present value of lease payments is less than the asset's fair value. the lessee obtains control of the use of the asset. the usual risks and rewards are retained by the lessor.
How do you think expense stops and CPI adjustments in leases affect the riskiness of the lease from the lessor’s point of view?
Compared to using a fi nance lease, a lessee that makes use of an operating lease will mostlikely report higher:A . debt.B . rent expense.C . cash fl ow from operating activity.