USGAAP and IFRS Provide Criteria for Distinguishing Operating Leases from Capital

question 222

Multiple Choice

U.S.GAAP and IFRS provide criteria for distinguishing operating leases from capital leases.Which of the following is not true?

• A)Under the capital, or finance, lease method, the lessee records the signing of a capital lease the same as if the lessee sold the leased asset for an installment note receivable.
• B)Under the capital, or finance, lease method, the lessee recognizes interest expense on the lease liability, similar to recognizing interest expense on long-term notes or bonds.
• C)Under the capital, or finance, lease method, the lessee amortizes the leased asset, similar to recognizing depreciation on buildings and equipment.
• D)Under the capital, or finance, lease method, the lessee records the leased asset and the lease liability on the balance sheet at the present value of the contractual cash flows at the time of signing the lease.
• E)The capital, or finance, lease method, treats leases equivalent to installment purchases or sales, where the lessee borrows funds from the lessor to purchase the asset and the lessor recognizes profit at the time of sale.

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Definitions:

Long-term Note Payable

A liability in the form of a written promise to pay a specified sum of money, with a maturity of more than one year from the date of issuing.

Accrual Accounting

An accounting method where transactions are recorded when they are earned or incurred, rather than when cash is exchanged, providing a more accurate financial picture.

Adjusting Process

The adjusting process in accounting involves making entries at the end of an accounting period to allocate income and expenses to the period in which they actually occurred.

Accrued Revenues

Revenues earned by a company for goods or services provided but not yet billed or paid for by the customer.