Which one of the following correctly states one of the conditions established by the IRS for a lease to be considered valid for tax purposes

An operating lease:    A.  is recorded at its net present value on the balance sheet. B.  is recorded on the balance sheet as both an asset and a liability. C.  is recorded at its estimated residual balance on the balance sheet. D.  is reflected in the footnotes rather than on the balance sheet. E.  does not appear either on a financial statement or in the footnotes. Refer to section 27.2

21.

Which one of the following will classify a lease as a capital lease for accounting purposes?    A.  The lease transfers ownership of the asset to the lessee by the end of the lease. B.  The lease term is 75 percent or less of the estimated economic life of the asset. C.  The lessee can buy the asset at fair market value at the end of the lease. D.  The initial present value of the lease payments equals or exceeds 80 percent of the fair market value of the asset. E.  The total of the lease payments exceeds $100,000. Refer to section 27.2

22.

A capital lease is recorded as an asset on the balance sheet in an amount equal to:    A.  the dollar amount of each lease payment multiplied by the total number of lease payments in the original agreement. B.  the dollar amount of each lease payment multiplied by the number of lease payments remaining. C.  the dollar amount of each lease payment multiplied by the number of lease payments per year. D.  the lesser of the present value of the remaining lease payments or the cost of the asset. E.  the future value of the lease agreement at the time the agreement was made. Refer to section 27.2

23.

Which one of the following correctly states one of the conditions established by the IRS for a lease to be considered valid for tax purposes?    A.  The lease should have high payments at the beginning of the lease period and low payments at the end of the lease period. B.  Any renewal option should be based on a value which is less than the fair market value of the asset at the time of renewal. C.  The term of the lease must be less than 80 percent of the economic life of the asset. D.  The lessee should have the option to purchase the asset at a discounted price at the end of the lease term. E.  The lessor must have a reasonable expectation of earning an aftertax profit. Refer to section 27.3

24.

The IRS will disallow any lease that:    A.  has a lease term in excess of three years. B.  has a term that is less than one-half of the economic life of the asset. C.  involves a lessee that has net operating losses. D.  appears to exist solely to defer taxes. E.  reduces the combined tax obligations of the lessor and the lessee. Refer to section 27.3

25.

The incremental cash flows of leasing consider which of the following? I. cost of the asset II. lease payment amount III. applicable tax rate IV. annual depreciation expense    A.  I and III only B.  II and IV only C.  II, III, and IV only D.  I, II, and IV only E.  I, II, III, and IV Refer to section 27.4