Dirkin and Trente Inc

question 12

Multiple Choice

Dirkin and Trente Inc. (DTI) has decided to lease its electronic switching system for four years. The useful lifetime of the asset is seven years, the present value of the lease payments account for less than 60% of the fair value of the switching system and the outsourcing company which is leasing the equipment to DTI will hold title to the assets and reclaim the equipment at termination of the contract. What are the accounting implications of the leasing charges?

• A) Ignored as a capital lease is treated as asset ownership. Both the asset and the long-term liability side of the balance sheet increase and capital cost allowance is taken.
• B) Treated as an operating expense and appearing on the income statement. There is no impact on the balance sheet and no capital cost allowance is taken.
• C) An operating expense is recorded on the income statement and the book value of the asset increases both the asset and the long-term liability sides of the balance sheet. No capital cost allowance is taken.
• D) Decomposed into interest and principle with the interest portion appearing on the income statement as interest expense and the principle portion increasing total assets and long-term liabilities on the balance sheet. Capital cost allowance is taken.
• E) Decomposed into interest and principle with the interest portion appearing on the income statement as interest expense and the present value of the principle portion increasing total assets and long-term liabilities on the balance sheet. No capital cost allowance is taken.

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Definitions:

Cognitive Theories

Theories in psychology that emphasize internal mental processes as the key to understanding human behavior, including how we process information, solve problems, and make decisions.

Perception

The process by which individuals interpret and organize sensory information to understand their environment and experiences.

Memory

The faculty by which the mind stores and remembers information, critical to learning and the formation of identity.

Thought

The process of considering, formulating, or expressing ideas or mental images.