While Only Certain Leases Are Currently Accounted for as a Sale

question 194

Multiple Choice

While only certain leases are currently accounted for as a sale or purchase, there is theoretical justification for considering all leases to be sales or purchases.The principle reason that supports this idea is that:

• A)during the life of the lease, the lessee can effectively treat the property as if it were owned by the lessee.
• B)all leases are generally for the economic life of the property and the residual value of the property at the end of the lease is minimal.
• C)at the end of the lease, the property usually can be purchased by the lessee.
• D)a lease reflects the purchase or sale of a quantifiable right to the use of the property.

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Definitions:

Fair Value

An estimate of the price at which an asset or liability would be traded in a fair transaction between willing participants in the market.

Net Income

The remaining income of a business after deducting all expenditures and taxes from the gross revenue.

Equity Method

An accounting technique used by firms to assess the profits earned from their investments in other companies, where the investment is recorded at original cost and adjusted for the investor's share of the investee's profit or loss.

Outstanding Voting Stock

The shares of a corporation that are issued, held by shareholders, and entitled to vote in corporate decisions.