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IIA CIA Exam
Certified Internal Auditor Exam (Page 50 )

Updated On: 12-Jan-2026
Page 50 of 342
PDF with 1702 Questions

Plantation should treat Lease A as a(n)

  1. Finance lease with an initial asset amount of US $101.400.
  2. Operating lease charging US $14, 200 in rental expense and US $800 in executory costs to annual operations.
  3. Operating lease charging the present value of the yearly rental expense to annual operations.
  4. Operating lease charging US $15.000 in rental expense and US $800 in executory costs to annual operations.

Answer(s): D

Explanation:

Lease a is an operating lease with a $ 15, 000 annuel rental expense with annuel executory costs(e.g.. maintenance, insurance, and taxes)of Us$800 to be paid by the lessee.an operating lease does not transfer the risks and rewards of ownership to the leasee.lease a is nothing more than a rentl arrangement. Circumstances in which the risks and rewards of ownership are normally deemed to be transferred include the following :the lease tranfers title to the lessee, the lease has a bargain purchase option, the lease term is for the major part of the useful life of the leased asset, the present value of the minimum lease payments is at least substantially all of the asset's fair value, or the asset is usable only by the lessee without major modification. On January1, plantation partners is planning to enter as the lessee into the two lease agreements described in the opposite column.each lease is noncancelable, and plantation does not receive title to either leased property during or at the end of the lease term.all payments required under these agreements are due on January 1 each year.



KW Ltd. leased equipment under a 4-year. noncancelable lease properly classified as a finance lean-, The lease does not transfer ownership or contain a bargain purchase option. The equipment had an estimated economic life of 5 years and an estimated residual value of US $20.000. Terms of the lease included a guarantees:] residua value of US $50, 000. KW initially recorded the leased equipment at US $240, 000. and its depreciation polity for owned assets is to use the straight-line method. Thus, the amount of depreciation that should be charged each year is

  1. US $55, 000B.
  2. US $47, 500
  3. US $44, 000
  4. US $38, 000

Answer(s): B

Explanation:

Depreciation should be consistent with the accounting policy for owned assets. Absent a reasonable certainty that the lessee will own the asset at the end of the lease term, it should be fully depreciated over the shorter of the useful life or the lease term. The lease does not transfer ownership or contain a bargain purchase option. Accordingly, the period of amortization should be the lease term. In accordance with the straight-line method used by KW for owned assets, the depreciable base for this finance lease is equal to the US $240, 000 initially recorded minus the US $50, 000 guaranteed residual value allocated equally over the 4-year lease term. Consequently, annual depreciation expense is US $47, 500 [($24, 00, 000 ­ $50, 000) - 4 years]. On January 1. Plantation Partners is planning to enter as the lessee into the two lease agreements described in the opposite column. Each lease is noncancelable, and Plantation does not receive title to either leased property during or at the end of the lease term. All payments required under these agreements are due on January 1 each year.



At the inception of a finance lease, how should the lessee account for guaranteed residual value?

  1. As part of minimum lease payments at present value.
  2. As part of minimum lease payments at future value.
  3. As part of minimum lease payments at future value of an annuity due.
  4. As not a part of the lease contract.

Answer(s): A

Explanation:

The lessee records a finance lease as an asset and a liability at the inception of the lease at the fair value of the leased propertynot to exceed the present value of the minimum lease payments). The lessee's minimum lease payments include required paymentsexcluding contingent rent and costs for services and taxes to be paid by and reimbursed to the lessor) during the lease term and the amount of a bargain purchase option. If no bargain purchase option exists, the minimum lease payments equal the sum of the minimum payments payable over the lease term and any amounts guaranteed by the lessee or by a party related to the lessee.



Which of the following leases ordinarily should be classified as a finance lease by the lessee?

  1. Lease A only
  2. Lease B only
  3. Leases A, C and D
  4. Leases C and D only.

Answer(s): C

Explanation:

A lease should be classified as a finance lease by a lessee if it transfers substantially all of the risks and rewards of ownership. A lease is classified at its inception. It normally is classified as a finance lease if, for example, 1) the lease provides for the transfer of ownership of the leased asset by the end of the lease term;2) the lease contains a bargain purchase option, i.e., the lessee has the option to purchase at a price expected to be sufficiently below the fair value of the exercise date that, at the lease's inception, exercise is reasonably certain;3) the lease term is for the major part of the economic life of the leased asset;4) the present value of the minimum lease payments is at least substantially all of the fair value of the leased asset at the inception of the lease; or5) the leased asset is such that it can be used only by the lessee without major modification_ Lease A a finance lease because the terms of the lease include a bargain purchase option. Lease C passes the economic life test, and lease D passes the recovery of investment test.



Which of the following statements about a finance lease is false?

  1. The lessor capitalizes the net investment in the lease.
  2. The lessor records the leased item as an asset.
  3. The lessee records depreciation or finance cost allowance on the leased asset
  4. The lease arrangement represents a form of financing.

Answer(s): B

Explanation:

When a transaction meets the criteria of a finance lease, the lessor removes the leased item from the books and records lease payments receivable regardless of whether the lessor is a manufacturer or dealer. The lessee records and depreciates the leased item under a finance lease.



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