 In this presentation, we will take a look at multiple choice questions related to bonds, notes payables, and long-term liabilities. Support a counting instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources, such as Excel practice problems, PDF files, and more, like QuickBooks backup files, when applicable. So once again, click the link below for a free month membership to our website and all the content on it. First question. All are true except A. For a capital lease, the lease records the lease item as a fixed asset. B. For a capital lease, the leasee depreciates the leased asset. C. Capital leases create a long-term liability but operating leases do not. D. Capital leases do not transfer ownership of the asset under the lease. Or E. For an operating lease, the leasee reports the lease payments for as an expense. Okay, so let's go through this again using the process of elimination. All are true except. Now, it looks like we're talking about leases, operating leases versus capital leases here, so note if we want to just get the difference in our head of those two. Remember what a capital leases basically means that in substance over form, substance is that it's actually a purchase, whereas in form it was put up as a lease. So we have to treat it like a purchase. And so everything else follows from that. So really what you're saying a capital lease is like buying it. So that's going to be the difference between the two. Operating the lease is like a lease where you just have the lease payments. Capital leases pretty much kind of like you bought it, even though you wrote it up like a lease type of thing. So knowing that, let's go through these. A, for a capital lease, the leasee records the lease item as a fixed asset. And if we thought about a capital lease as it's buying it, then yeah, we're going to record it as a fixed asset, something on the balance sheet, not on the income statement. So A is true, so it's not the correct answer. B says the capital lease, the leasee depreciates the leased asset. So that's the leasee like the buyer. And you have to get these two under control here, the leasee and the leaseor, they sound really similar. The leaseor is the one that is selling the asset in essence on the capital lease. And the leasee is the one that's leasing or pretty much kind of like buying. So the leasee then pretty much bought it, put the asset on the books and therefore has to depreciate it. So B is true, the leasee is going to depreciate it. And then C says capital leases create a long term liability, but operating leases do not. Now if we don't really know, we might not, we might look at that and say, I'm not real sure on that one. So let's leave that one for now. And then D says capital leases do not transfer ownership of the asset under the lease. D did not transfer ownership. And again, it's kind of like a purchase. So you would think the ownership would transfer. So I'm going to keep that one for now. And then E says for an operating lease, the leasee reports the lease payments as an expense. Now an operating lease is going to be kind of like the normal lease. So the leasee reports the lease payments as an expense under a normal lease. Yeah, that would be typically the case when we make a payment. We're just going to say lease expense or rent expense and credit the payment. So that's probably what happened. So E sounds like it's true. So we're left with C and D. So let's go through this again. All are true except C, capital leases create a long term liability, but operating leases do not or D, capital leases do not transfer ownership of the asset under the lease. So if we go through those two, we're going to say first C, the capital lease create a long term liability, but operating leases do not. Now that's actually true. And the reason that is is because if you think about it, if they set something up as a lease, but it was really a purchase, then the purchases must be a financing purchase. No cash was paid for it because they set it up like a lease. So what happens when we have to put that on the books, we have to assume that it was purchased at a financing agreement, meaning we would have to debit the capital lease as an asset, a fixed asset equipment, and then we'd have to credit not cash because cash wasn't paid. We'd have to credit a liability, a note payable. Something's owed because in essence, this thing has been purchased. And that's often what companies are trying to avoid is to have this liability on the books. That's why they set it up as a lease possibly. So this does result in a liability. So D is the answer where it says capital leases do not transfer ownership of the asset under the lease. And they do, of course, because that's the point. What's happening is it's really a sale, not a lease. So in essence, ownership has been transferred. So that's going to be D. It's going to be so all true except all are true except D. Capital leases do not transfer ownership of the assets under the lease. Next question. Bonds that have an option to retire them before maturity are A, normal bonds, B, serial bonds, C, seeking fund bond, D, high value bonds or E, callable bonds. Let's go through this again using the process of elimination. Bonds that have a have a bonds that have an option to retire them before maturity are A, normal bonds. Now I'm not sure that's a term normal bonds that doesn't sound familiar. So we might there might be a normal bond, but it's probably not just called a normal bond. So I don't think normal bonds is a thing. B says serial bonds. And that sounds familiar. That sounds like a type of bond we've worked with. So I'll keep that for now. C says sinking fund bonds. That doesn't doesn't sound like something we've worked with much. It doesn't seem right. I'm going to say it's not C. I'm going to guess not C. D says high value bonds. And again, that sounds like a financing type term, maybe if we were investing, but it doesn't sound like something we've gone over here in types of bonds. So I don't think it's going to be high value. And then E says callable bonds. And that sounds familiar, like something we've looked at. So I'm going to keep E. So we're left with B and E serial bonds or callable bonds. If we go through it again, bonds that have an option to retire them before maturity are either B serial bonds or E callable bonds. And of the two, it's actually going to be callable bonds. Serial bonds means they're going to retire and there's multiple maturity dates. So the callable bonds are the ones that are going to be called before the maturity is up. They have that option to do so. So bonds that have an option to retire them before maturity are E callable bonds.