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CLFP EXAM - Financial and Tax Accounting for Leases – Questions & Answers
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CLFP EXAM - Financial and TaxAccounting for Leases – Questions &
Answers
What is a primary goal of the accounting profession? - -Consistent treatment
of like transactions to allow clarity in presentation and consistency in
interpretation of financial statements prepared by various individuals or
entities.
-How did APB (Accounting Principals Board) fail? - -Created Opinion #5
(Reporting of Leases in Financial Statements of Lessees) and Opinion #7
(Accounting for Leases in Financial Statements for Lessors) that ha different
opinions and left lessors & lessees with conflicting rules.
-What was FASB 13? - -Financial Accounting Standards Board issued
"Accounting for Leases" which was a comprehensive set of standards to be
followed by lessors and lessees in accounting lease transactions.
-What is Accounting Standards Codification? - -Approved by FASB in 7/2009,
a single source of of authoritative US accounting and reporting standards
-What now governs lease accounting? - -ASC 840
-What is a Bargain Renewal Option? - -a provision allowing lessee, at his
option, to renew the lease for a rental sufficiently lower than the expected
fair value of the property at the date the option becomes excercisable. It is
reasonably assured the renewal option will be exercised.
-What is a Bargain Purchase Option? - -a provision allowing lessee, at his
option, to purchase the property for a price sufficiently lower than the
expected fair market value of the property at the date the option becomes
excercisable. It is reasonably assured the purchase option will be exercised.
-What are Contingent Rentals? - -Rentals that represent increases or
decreases in the lease payments made that result from changes in the
factors on which lease payments are based occurring subsequent to the
inception of the lease. Increases may occur due to increased construction
cost or indexed interest rates.
-What is Economical Useful Life of Leased Property? - -At the inception of
the the lease, the estimated remaining period during which the property is
expected to be economically usable for its intended purpose by one or more
users. This may be impacted by usage, technology and deterioration.
Independent of lease term.
, -What is Residual Value of Leased Property? - -Estimated fair value of the
lease property at the end of the lease.
-What is Executory Costs? - -The costs such as insurance, maintenance and
taxes incurred for the leased property, whether paid by lessor or lessee. Also
include costs paid by lessee as guarantor.
-What is Value of Leased Property? - -The price at which the property could
be sold at an arm's length transaction by unrelated parties.
1.) normal selling price, net volume discounts, for a lessor who
manufacturer/dealer
2.) Cost, net volume discounts for a lessor that is note a manufacturer or
dealer.
-What is Implicit Interest Rate? - -The discount rate that, when applied to
the minimum lease payments cause the aggregate present value at the
beginning of the lease term to be equal to the fair value of the leased
property to the lessor at the inception of the lease.
-What is Inception of the Lease? - -The date lease commitment.
-What is Incremental Borrowing Rate? - -The rate, at the inception of the
lease, the lessee would have incurred to borrow, under like terms, the funds
necessary to purchase the lease asset.
-What is Initial Direct Cost (IDC)? - -Costs incurred by lessor that are
1) to originate the lease in transactions with independent third parties that
are required and would have occurred regardless of leasing
2.) certain cost incurred by the lessor
-What is a Lease? - -An agreement conveying right to use property, plant or
equipment for stated period of time and rental payment.
-What is Lease Term? - -The fixed, non cancel-able term of the lease plus:
1.) period covered by bargain renewal options
2.) period covered by a renewal when a significant penalty for failure to
renew exists;
3.) Ordinary renewal periods
4.) Renewal periods that precede a bargain purchase option.
5.) Renewal periods that are at the option of the lessor
6.) does not exceed term beyond when the bargain purchase option can be
exercised.
-What is Maximum Lease Payments? - -All payments the lessee is obligated
to make under the lease agreement (outside of executory costs)
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