The following questions dealing with leases are adapted from questions that previously appeared on Certified Management Accountant (CMA) examinations. The CMA designation sponsored by the Institute of Management Accountants (www.imanet.org) provides members with an objective measure of knowledge and competence in the field of management accounting. Determine the response that best completes the statements or questions.

1. For a direct-financing lease, the gross investment of the lessor is equal to the

a. Present value of the minimum lease payments minus the unguaranteed residual value accruing to the lessor at the end of the lease term.
b. Lower of 90% of the present value of the minimum lease payments or the fair value of the leased asset.
c. Difference between the fair value of the leased asset and the unearned interest revenue.
d. Minimum lease payments plus the unguaranteed residual value accruing to the lessor at the end of the lease term.

2. Howell Corporation, a publicly traded corporation, is the lessee in a leasing agreement with Brandon Inc. to lease land and a building. If the lease contains a bargain purchase option, Howell should record the land and the building as a(n)

a. Operating lease and capital lease, respectively.
b. Capital lease and operating lease, respectively.
c. Capital lease but recorded as a single unit.
d. Capital lease but separately classified.

3. Initial direct costs incurred by the lessor under a sales-type lease should be

a. Deferred and allocated over the economic life of the leased property.
b. Expensed in the period incurred.
c. Deferred and allocated over the term of the lease in proportion to the recognition of rental income.
d. Added to the gross investment in the lease and amortized over the term of the lease as a yield adjustment.