Free CLFP Benefits Questions and Answers — Questions and Answers
Question 1: How should a Lessor account for an Operating Lease on its income statement?
- Debt incurred by lessor to acquire equipment remains on the balance sheet as long term liability
- 1) Sale-Type selling profit will be impacted; <br> 2.) To be classified as sale-type, the lease contact along (not residual) must transfer control of the underlying asset to the lessee <br> 3) If not met, lease will likely be direct finance lease with revenue being realized over term of the lease
- Rental income is recognized on operating leases in the period the payment is a receivable. If payments are not level (increasing or decreasing) they are recorded on a straight-line basis unless the alternative payment is more representative of property usage (Correct answer)
- Unearned income is amortized over the lease term so as to produce a constant periodic rate of return on the net investment.
Correct answer: Rental income is recognized on operating leases in the period the payment is a receivable. If payments are not level (increasing or decreasing) they are recorded on a straight-line basis unless the alternative payment is more representative of property usage
For an operating lease, the lessor retains the risks and rewards of ownership of the leased asset. Consequently, the lessor recognizes rental income over the lease term, typically on a straight-line basis, as the asset is used by the lessee. This accounting method reflects the ongoing service provided by the lessor rather than a sale of the asset.
Question 2: What is Value of Leased Property?
- Regarding elements of a balance sheet, a current asset consisting of interest or dividend-yielding holdings expected to be converted to cash within a year. Also called short term investments including stocks, bonds, CD's and time deposits. Listed at their original cost.
- The price at which the property could be sold at an arm's length transaction by unrelated parties. <br> 1.) normal selling price, net volume discounts, for a lessor who manufacturer/dealer <br> 2.) Cost, net volume discounts for a lessor that is note a manufacturer or dealer. (Correct answer)
- 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.
- The fixed, non cancel-able term of the lease plus: 1.) period covered by bargain renewal options <br> 2.) period covered by a renewal when a significant penalty for failure to renew exists; <br> 3.) Ordinary renewal periods 4.) Renewal periods that precede a bargain purchase option. <br> 5.) Renewal periods that are at the option of the lessor <br> 6.) does not exceed term beyond when the bargain purchase option can be exercised.
Correct answer: The price at which the property could be sold at an arm's length transaction by unrelated parties. <br> 1.) normal selling price, net volume discounts, for a lessor who manufacturer/dealer <br> 2.) Cost, net volume discounts for a lessor that is note a manufacturer or dealer.
The Value of Leased Property refers to the fair market value of the asset at the commencement of the lease. This value is determined by the price at which the property could be sold in an arm's length transaction between unrelated parties. For a manufacturer or dealer lessor, it's the normal selling price, while for other lessors, it's typically the cost of the asset.
Question 3: Describe a key element to understanding a balance sheet.
- 1.) Lessee's will account for Operating Leases on their balance sheet (asset and debt) regardless of lease classification; <br> 2.) The asset would be the value of the right to use the asset, the PV of the rental payments. <br> 3.) Exception will be leases < 12 months in term
- IDC incurred by lessor are capitalized, reduced from expense and amortized on a straight-line basis over over the term of the lease to offset income.
- 1.) Assets - Liabilities = Equity <br> 2.) any increase or decrease on one side of the equation always creates a corresponding entry on the other side of the equation (Correct answer)
- 1.) review residual values annually <br> 2.) If decline, determine if temporary or permanent. <br> 3.) if permanent, value is to be revised and loss in the investment during the current period. <br> 4.) Residual values are never adjusted up, even in cases of past losses.
Correct answer: 1.) Assets - Liabilities = Equity <br> 2.) any increase or decrease on one side of the equation always creates a corresponding entry on the other side of the equation
A key element to understanding a balance sheet is the fundamental accounting equation: Assets = Liabilities + Equity. This equation must always remain in balance, meaning that every financial transaction affects at least two accounts, ensuring that any increase or decrease on one side of the equation creates a corresponding entry on the other side or within the same side. This principle provides a snapshot of a company's financial position at a specific point in time.
Question 4: What are Revenues?
- Regarding elements of a balance sheet, equity consisting of the total accumulated net income minus the total accumulated dividends since the company's founding.
- Regarding elements of an income statement, this figure represents the sum of all revenues minus the sum of all expenses. Commonly referred to as the "bottom line"
- Regarding elements of a balance sheet, a current liability consisting of amounts estimated by an accountant to have been incurred during the accounting period.
- Regarding elements of an income statement, all sources of trade revenues flowing into the business for services rendered or goods sold. Typically reported net of sales returns. (Correct answer)
Correct answer: Regarding elements of an income statement, all sources of trade revenues flowing into the business for services rendered or goods sold. Typically reported net of sales returns.
Revenues, as an element of an income statement, represent all sources of income generated by a business from its primary operations, such as selling goods or providing services. They are typically reported net of any sales returns or allowances. Revenues are crucial for understanding a company's top-line earnings before expenses are deducted, indicating the total inflow of economic benefits.
Question 5: What are fixed assets?
- Regarding elements of a balance sheet, assets similar to buildings, land, machinery, equipment, office machines, furniture etc. Typically capitalized and amortized or depreciated over the useful life. Typically called plant and equipment. (Correct answer)
- Regarding elements of a balance sheet, a current asset representing the amount due from customers for payment of services or merchandise
- Regarding elements of an income statement, these are the expenses related to conducting the business. They generally fall into two main categories: selling or general/administrative.
- Regarding elements of an income statement, this is key to developing an understanding of the accounting methods and polices applied by a business. Also report significant items to the reader. Also includes other details and schedules of long term debt.
Correct answer: Regarding elements of a balance sheet, assets similar to buildings, land, machinery, equipment, office machines, furniture etc. Typically capitalized and amortized or depreciated over the useful life. Typically called plant and equipment.
Fixed assets are long-term tangible assets that a company owns and uses in its operations to generate income, rather than for resale. These assets, such as buildings, land, machinery, and equipment, are capitalized on the balance sheet. Their cost is systematically expensed over their useful life through depreciation or amortization, reflecting their contribution to revenue generation over time.
Free CLFP Benefits Questions and Answers
How should a Lessor account for an Operating Lease on its income statement?