Problems 13-1 Multiple Choice

1. Under a sales type lease, what is the meaning of gross investment in the lease?

a. Present value of minimum lease payments

b. Absolute amount of minimum lease payments
c. Present value of minimum lease payments plus present value of unguaranteed
residual value
d. Aggregate of minimum lease payments and unguaranteed residual value

2. Net investment in a sales type lease is equal to

a. Gross investment in the lease less unearned finance income

b. Cost of the leased asset
c. The minimum lease payments
d. The minimum lease payments less unguaranteed residual value

3. These are incremental costs that are directly attributable to negotiating and
arranging a lease

a. Initial direct costs

b. Transaction costs
c. Costs of services
d. Executory costs

4. Initial direct cost incurred by the lessor under a sales type lease should be

a. Deferred and allocated over the economic life of the leased property.
b. Expensed in the period incurred
c. Deferred and allocated over the term of the lease in proportion to the
recognition of rental income.
d. Added to the gross investment in the lease and amortized over the term of the
lease as a yield adjustment.

5. Which of the following statements characterizes a sales type lease?

a. The lessor recognizes only interest revenue over the life of the asset.
b. The lessor recognizes only interest revenue over the lease term.
c. The lessor recognizes a dealer’s profit at lease inception and interest revenue
over the lease term.
d. The lessor recognizes a dealer’s profit at lease inception and interest revenue
over the life of the asset.
6. The profit on a finance lease transaction for lessors who are manufacturers or
dealers should

a. Not be recognized separately from finance income

b. Be recognized in the normal way on the transaction
c. Only be recognized at the end of the lease term
d. Be recognized on a straight line basis over the life of the lease

7. The sales revenue recognized at the commencement of the lease by a manufacturer

or dealer is the

a. Fair value of the asset

b. Present value of minimum lease payments
c. Fair value of the asset or present value of the minimum lease payments,
whichever is lower.
d. Fair value if the asset or present value of the minimum lease payments,
whichever is higher.

8. What is the treatment of an unguaranteed residual value in determining the cost of

sales under a sales type lease?

a. The unguaranteed residual value is ignored.

b. The unguaranteed residual value is added to the cost of the leased asset.
c. The unguaranteed residual value is deducted from the cost of the leased asset at
absolute amount.
d. The unguaranteed residual value is deducted from the cost of the leased asset at
present value.

9. The excess of the fair value of leased property at the inception of the lease over the
carrying amount shall be recognized by the dealer lessor as

a. Unearned income from a sales type lease

b. Unearned income from a direct financing lease
c. Manufacturer’s profit from a sales type lease
d. Manufacturer’s profit from a direct financing lease

10. In a lease that is recorded as a sales type lease by the lessor, interest revenue
a. Does not arise
b. Shall be recognized over the period of the lease using the interest method
c. Shall be recognized over the period of the lease using the straight line method
d. Shall be recognized in full as revenue at the inception of the lease