📘 LEASE ACCOUNTING (US GAAP – ASC 842)
50 MCQs with Correct Answers
1. Under US GAAP, a lease exists when:
A. Ownership transfers at end
B. Contract conveys right to control use of identified asset
C. Payments exceed fair value
D. Lease term exceeds 12 months
Answer: B
2. Which of the following is NOT a lease classification under US GAAP for lessee?
D. Short-term lease (exemption)
Answer: C
3. A lease is classified as a finance lease if:
A. Lease term is insignificant
B. Ownership transfers at end
C. Asset is low value
D. Lease payments are variable only
Answer: B
4. One criterion for finance lease classification is:
A. Lease term ≥ major part of asset’s economic life
B. Lease payments are cancellable
C. Residual value guaranteed by lessor
D. Lease is non-renewable
Answer: A
5. “Major part” under US GAAP is generally interpreted as:
A. 50%
B. 60%
C. 75%
D. 90%
Answer: C
6. Present value of lease payments equals “substantially all” of fair value if approximately:
A. 70%
B. 80%
C. 90%
D. 100%
Answer: C
7. Lessee recognizes which of the following for both finance and operating leases?
A. Lease expense
B. Right-of-use asset
C. Accumulated depreciation
D. Lease income
Answer: B
8. Lease liability is initially measured at:
A. Fair value of asset
B. Undiscounted lease payments
C. Present value of lease payments
D. Residual value
Answer: C
9. Discount rate used by lessee is:
A. Risk-free rate
B. Incremental borrowing rate (if implicit rate unknown)
C. Prime lending rate
D. Inflation rate
Answer: B
10. Which payment is included in lease liability?
A. Variable payments based on sales
B. Variable payments based on index/rate
C. Maintenance cost
D. Insurance cost
Answer: B
11. Short-term lease exemption applies when lease term is:
A. ≤ 6 months
B. ≤ 9 months
C. ≤ 12 months
D. ≤ 18 months
Answer: C
12. For a short-term lease, lessee:
A. Capitalizes ROU asset
B. Recognizes lease expense straight-line
C. Recognizes depreciation and interest
D. Recognizes liability only
Answer: B
13. Finance lease expense consists of:
A. Single lease expense
B. Depreciation + Interest
C. Variable expense only
D. Rent expense
Answer: B
14. Operating lease expense is recognized:
A. Front-loaded
B. Back-loaded
C. Straight-line
D. Only at payment dates
Answer: C
15. Under operating lease, interest component:
A. Not recognized
B. Included within single lease expense
C. Reported separately
D. Capitalized
Answer: B
16. Which lease results in higher expense in early years?
A. Operating lease
B. Finance lease
C. Short-term lease
D. Service contract
Answer: B
17. For cash flow classification, finance lease principal repayment is:
A. Operating activity
B. Investing activity
C. Financing activity
D. Non-cash activity
Answer: C
18. Operating lease payments are classified as:
A. Financing cash flow
B. Investing cash flow
C. Operating cash flow
D. Mixed cash flow
Answer: C
19. Initial direct costs are:
A. Expensed immediately
B. Excluded from ROU asset
C. Included in ROU asset
D. Treated as interest
Answer: C
20. Lease incentives received reduce:
A. Lease liability
B. Lease expense only
C. ROU asset
D. Interest cost
Answer: C
21. Guaranteed residual value affects:
A. Lease expense only
B. Lease liability measurement
C. Depreciation only
D. Cash flow classification
Answer: B
22. Non-lease components:
A. Must be combined with lease
B. Are expensed separately unless elected
C. Ignored
D. Capitalized always
Answer: B
23. Lessee may elect to combine lease and non-lease components:
A. Only for finance leases
B. Only for operating leases
C. For all asset classes
D. Never allowed
Answer: C
24. Reassessment of lease liability occurs when:
A. Discount rate changes
B. Lease term changes
C. Market rent changes
D. Inflation increases
Answer: B
25. Variable payments based on performance:
A. Included in liability
B. Excluded from liability
C. Discounted
D. Capitalized
Answer: B
26. A lease with bargain purchase option is:
A. Operating lease
B. Short-term lease
C. Finance lease
D. Service contract
Answer: C
27. Lessor classification includes:
A. Operating and finance only
B. Sales-type, direct financing, operating
C. Capital lease only
D. Finance and short-term
Answer: B
28. Sales-type lease occurs when:
A. PV of payments < carrying value
B. Control transfers to lessee
C. Lease term < 50%
D. Asset is returned
Answer: B
29. Lessor recognizes selling profit at commencement in:
A. Operating lease
C. Sales-type lease
D. Short-term lease
Answer: C
30. In direct financing lease, lessor profit is:
A. Immediate
B. Deferred
C. Not recognized
D. Variable
Answer: B
31. Under operating lease, asset remains on:
A. Lessee’s balance sheet
B. Lessor’s balance sheet
C. Both balance sheets
D. Off-balance sheet
Answer: B
32. Lease modifications that add asset at market rate are treated as:
A. Reassessment
B. New lease
C. Termination
D. Error correction
Answer: B
33. Lease term includes:
A. Only non-cancellable period
B. Renewal periods reasonably certain
C. All possible extensions
D. Only minimum term
Answer: B
34. Residual value guaranteed by lessee:
A. Ignored
B. Included in lease liability
C. Expensed immediately
D. Treated as variable
Answer: B
35. Lease liability is reduced by:
A. Interest portion
B. Principal repayment
C. Lease expense
D. Depreciation
Answer: B
36. ROU asset amortization under operating lease is:
A. Straight-line
B. Based on usage
C. Accelerated
D. Not recognized
Answer: A
37. Which improves EBITDA?
A. Finance lease
B. Operating lease
C. Short-term lease
D. Both A & B
Answer: A
38. Lease accounting under US GAAP aims to:
A. Reduce profit volatility
B. Bring leases on balance sheet
C. Eliminate operating leases
D. Increase ROA
Answer: B
39. Which is NOT included in lease payments?
A. Fixed payments
B. In-substance fixed payments
C. Sales-based variable payments
D. Residual value guarantees
Answer: C
40. Initial measurement date of lease is:
A. Payment date
B. Commencement date
C. Contract signing date
D. Reporting date
Answer: B
41. Lease liability is a:
A. Current asset
B. Non-current asset
D. Equity
Answer: C
42. Operating lease liability is presented:
A. Off-balance sheet
B. As long-term debt
C. Separately from finance lease liability
D. As equity
Answer: C
43. Leaseback accounting depends on:
A. Lease term
B. Sale recognition
C. Asset class
D. Discount rate
Answer: B
44. If sale is not recognized in sale-leaseback:
A. Lease accounting applies
B. Financing arrangement applies
C. Operating lease applies
D. Asset is derecognized
Answer: B
45. ROU asset impairment follows:
A. ASC 350
B. ASC 360
C. ASC 330
D. ASC 606
Answer: B
46. Lease incentives reduce:
A. Lease liability only
B. Lease expense only
C. ROU asset
D. Interest cost
Answer: C
47. Incremental borrowing rate reflects:
A. Company credit risk
B. Asset risk
C. Market rent
D. Inflation only
Answer: A
48. Lease expense under operating lease affects:
A. EBIT only
B. EBITDA only
C. EBITDA & EBIT
D. Cash flow only
Answer: C
49. A lease cancellable by lessee without penalty is:
A. Included fully
B. Excluded from term
C. Considered short-term
D. Finance lease
Answer: B
50. Key CMA exam trick: Operating lease under ASC 842:
A. Is off-balance sheet
B. Has no liability
C. Still creates ROU asset & liability
D. Is identical to IFRS
Answer: C
NUMERICAL MCQs on LEASE ACCOUNTING (US GAAP – ASC 842), designed exactly at US CMA exam difficulty.
Each question tests PV logic, classification traps, expense pattern, and cash-flow impact.
1.
A lessee enters into a 5-year lease. Annual payment = ₹100,000 payable at beginning of each year.
Incremental borrowing rate = 10%.
PV factor (annuity due, 10%, 5 yrs) = 4.170.
Lease liability at commencement is:
A. ₹379,100
B. ₹417,000
C. ₹450,000
D. ₹500,000
Answer: B
📌 Trick: Beginning of year → annuity due
2.
Fair value of asset = ₹420,000
PV of lease payments = ₹380,000
Economic life = 8 years
Lease term = 6 years
Classification?
A. Operating lease
B. Finance lease
C. Short-term lease
D. Service contract
Answer: B
📌 Trick: Lease term = 75% of life → finance lease
3.
A finance lease has:
Lease liability = ₹500,000
Rate = 8%
Annual payment = ₹120,000 (end of year)
Interest expense for Year 1 is:
A. ₹40,000
B. ₹48,000
C. ₹60,000
D. ₹80,000
Answer: B
📌 Trick: Interest = Opening liability × rate
4.
Which lease shows higher total expense in Year 1, assuming same payments?
A. Operating lease
B. Finance lease
C. Both equal
D. Depends on payment timing
Answer: B
📌 Trick: Finance lease = front-loaded
5.
Operating lease:
Annual payment = ₹200,000
Lease term = 5 years
Lease expense per year equals:
A. ₹160,000
B. ₹180,000
C. ₹200,000
D. Varies each year
Answer: C
📌 Trick: Straight-line single expense
6.
Lease payments include:
Fixed rent: ₹90,000
Sales-based variable rent: ₹20,000
CPI-linked increase (current): ₹10,000
Lease liability includes:
A. ₹90,000
B. ₹100,000
C. ₹110,000
D. ₹120,000
Answer: C
📌 Trick: Exclude sales-based variable
7.
Initial direct costs of ₹15,000 are incurred.
ROU asset equals:
A. Lease liability only
B. Lease liability + IDC
C. Lease payments only
D. Fair value
Answer: B
8.
A 10-year lease, cancellable after 3 years without penalty.
Lease term considered:
A. 10 years
B. 3 years
C. 5 years
D. 7 years
Answer: B
📌 Trick: Cancellable without penalty → exclude
9.
Which cash flow classification is correct?
A. Finance lease interest → Financing
B. Finance lease principal → Operating
C. Operating lease payment → Operating
D. Operating lease payment → Financing
Answer: C
10.
A lease transfers ownership at end. Lease term = 4 yrs, economic life = 10 yrs.
Classification?
A. Operating
B. Finance
C. Short-term
D. Service
Answer: B
📌 Trick: Ownership transfer overrides %
11.
Residual value guaranteed by lessee = ₹50,000.
Effect on lease liability?
A. Ignored
B. Added to lease payments
C. Expensed
D. Treated as variable
Answer: B
12.
Lease term = 12 months exactly, no renewal.
Accounting treatment?
A. Finance lease
B. Operating lease
C. Short-term lease exemption
D. Service
Answer: C
13.
Which improves EBITDA the most?
A. Operating lease
B. Finance lease
C. Both equal
D. Short-term lease
Answer: B
📌 Trick: Depreciation & interest excluded from EBITDA
14.
ROU asset amortization under operating lease is:
A. Front-loaded
B. Back-loaded
C. Straight-line
D. Not recognized
Answer: C
15.
Lease liability decreases by:
A. Lease expense
B. Interest expense
C. Principal payment
D. Depreciation
Answer: C
16.
PV of lease payments = ₹900,000
Fair value = ₹950,000
This is approximately:
A. 85%
B. 90%
C. 95%
D. 100%
Answer: C
📌 Trick: Substantially all → finance lease
17.
Which item is excluded from lease liability?
A. Fixed payments
B. In-substance fixed payments
C. Sales-based variable rent
D. Residual guarantees
Answer: C
18.
Finance lease – depreciation period is:
A. Lease term always
B. Economic life always
C. Shorter of lease term or life (unless ownership transfers)
D. Based on usage
Answer: C
19.
Operating lease ROU asset impairment follows:
A. ASC 330
B. ASC 350
C. ASC 360
D. ASC 842
Answer: C
20.
Key US CMA exam trick:
A. Operating leases are off-balance sheet
B. Only finance leases create liability
C. Both leases create ROU asset & liability
D. IFRS and US GAAP identical
Answer: C
🎯 CMA EXAM QUICK NUMERICAL TRAPS
Annuity due vs ordinary annuity
75% / 90% thumb rules
Variable rent exclusion
EBITDA impact
Cash flow classification
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Below are MUST-REMEMBER BULLET POINTS for LEASE ACCOUNTING (US GAAP – ASC 842), compiled strictly for the US CMA exam.
These are high-yield, exam-scoring points — memorize them.
🔑 LEASE ACCOUNTING – US CMA MUST REMEMBER POINTS
📘 1. Core Concept (Golden Rule)
Lease exists when contract conveys right to control use of an identified asset
Control =
✔ Right to obtain economic benefits
✔ Right to direct use
📘 2. Lessee Lease Types (US GAAP)
Only 2 types:
Finance lease
Operating lease
Capital lease term is eliminated
📘 3. Finance Lease – ANY ONE CRITERION
A lease is finance lease if ANY ONE is met:
Ownership transfers at end
Bargain purchase option
Lease term = major part (≈75%) of economic life
PV of lease payments = substantially all (≈90%) of fair value
Asset is specialized
👉 If none → Operating lease
📘 4. Balance Sheet (VERY IMPORTANT)
Both finance & operating leases create:
Right-of-Use (ROU) Asset
Lease Liability
❌ No off-balance sheet operating leases (old GAAP)
📘 5. Initial Measurement
Lease Liability =
PV of lease payments
Discount rate:
Implicit rate (if known)
Else Incremental borrowing rate (IBR)
ROU Asset =
Lease liability
Initial direct costs
Prepaid rent
− Lease incentives received
📘 6. Lease Payments – INCLUDE
✔ Fixed payments
✔ In-substance fixed payments
✔ Variable payments based on index or rate
✔ Residual value guaranteed by lessee
✔ Purchase option (if reasonably certain)
📘 7. Lease Payments – EXCLUDE (CMA TRAP)
❌ Sales-based variable rent
❌ Usage-based variable rent
❌ Maintenance, insurance, service costs (unless elected to combine)
📘 8. Short-Term Lease Exemption
Lease term ≤ 12 months
No ROU asset or liability
Expense recognized straight-line
Election is optional
📘 9. Expense Pattern (VERY TESTED)
Lease Type
Expense Pattern
Finance lease
Depreciation + Interest (Front-loaded)
Operating lease
Single lease expense (Straight-line)
📘 10. EBITDA Impact (EXAM FAVORITE)
Finance lease → Higher EBITDA
Operating lease → Lower EBITDA
Reason:
Depreciation & interest excluded from EBITDA
📘 11. Cash Flow Classification
Finance Lease:
Interest → Operating
Principal repayment → Financing
Operating Lease:
Entire payment → Operating
📘 12. Lease Term Determination
Lease term includes:
Non-cancellable period
Renewal periods reasonably certain
Termination options not included if cancellable without penalty
📘 13. Annuity Rule (NUMERICAL TRAP)
Payment at beginning → Annuity Due
Payment at end → Ordinary Annuity
👉 Always check payment timing
📘 14. Residual Value
Guaranteed by lessee → Included in liability
Unguaranteed → Ignored
📘 15. Lease Modification
Adds asset at market price → New lease
Changes term or payments → Remeasure liability
📘 16. Lessor Classification (Quick Recall)
Sales-type lease
Direct financing lease
Operating lease
📘 17. Sales-Type vs Direct Financing
Aspect
Sales-Type
Direct Financing
Selling profit
Immediate
Deferred
Control transfer
Yes
Yes
📘 18. Sale-Leaseback (CMA Trick)
If sale is recognized → Lease accounting applies
If sale not recognized → Financing arrangement
📘 19. Impairment
ROU asset impairment → ASC 360
📘 20. MOST IMPORTANT CMA LINE
Under ASC 842, both operating and finance leases are ON the balance sheet.
🎯 EXAM DAY MEMORY HOOK
“75–90–12–EBITDA”
75% life
90% fair value
12 months short-term
Finance lease ↑ EBITDA
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