Deck 7: Accounting for Leases

Question 1

Which statement is correct about the "guaranteed residual value"?

A)It is an indicator that the lessee will take care of the property.
B)It is provided by the lessor.
C)Lessor assumes the risk of the property falling below the guaranteed amount.
D)It is not included in the present value of the lease payment calculation.

Answer 1

A

Question 2

What entry is required for the lessor for an operating lease?

A)Gain/loss on asset sale.
B)Net investment in lease.
C)Interest income.
D)Depreciation expense.

Answer 2

D

Question 3

For the lessor, which condition would result in an operating lease?

A)Risk of breakage is with the lessee.
B)Reward of high resale value is with the lessor.
C)Risk of change in rental rates is with the lessee.
D)Reward of longer than expected useful life for the leased asset is with the lessee.

Answer 3

B

Question 4

List factors that impact the degree to which this agency cost is a factor.

Question 5

What is the incremental borrowing rate?

A)The interest rate that the lessor would have to pay on a similar lease or loan.
B)The interest rate that the lessee would have to pay on a similar lease or loan.
C)The risk adjusted interest rate from the cash flow stream expected by the lessor.
D)The risk adjusted interest rate from the cash flow stream expected by the lessee.

Question 6

What are four examples of lease conditions that help mitigate agency costs?

Question 7

What is meant by the agency cost of leasing?

Question 8

What is true respecting the economics behind leasing arrangements?

A)By agreeing to provide a guarantee that the leased property will be worth at least a certain amount, the lessor assures the lessee that the property will be treated with due care.
B)A guaranteed residual value means that the lessee bears the risk and cost of the property falling below the specified value of the guarantee.
C)Since the lessor is assured of receiving the guaranteed amount (or more), the guaranteed residual value does not form part of the lease payment.
D)The bargain purchase option (BPO)is not included when calculating the present value of lease payments even though a BPO is almost certain to be exercised.

Question 9

Which statement is correct about "agency cost of leasing"?

A)Conditions can be added to the lease agreement to increase agency costs.
B)Agency costs are nil if the lease contract covers the entire useful life of the asset.
C)Assets that are easy to damage are better candidates for leasing.
D)Assets that are difficult to damage have higher agency costs.

Question 10

For the lessor, what is the general criterion for deciding whether a lease is an operating or a finance lease?

Question 11

Which statement is correct about "agency cost of leasing"?

A)The lease payments are lowered to compensate for the agency cost of leasing.
B)Shorter lease terms decrease the agency cost of leasing.
C)Agency cost of leasing is an illustration of the "moral hazard" problem.
D)Agency cost of leasing is an illustration of the "adverse selection" problem.

Question 12

Which will decrease the "agency cost of leasing"?

A)Leased assets that are easy to damage.
B)Leased assets that require maintenance and care by the lessee.
C)Having lease terms that cover small portions of the asset's useful life.
D)Having an unguaranteed residual value by the lessee.

Question 13

Which statement is correct about the bargain purchase option (BPO)?

A)It is cash that the lessee will receive at the end of the lease.
B)It cannot be assumed that the BPO will be exercised.
C)It is excluded in the present value of the lease payment calculation.
D)It means that it is almost certain that ownership will transfer to the lessee.

Question 14

Which factor would contribute toward the lessor classifying a lease as a finance lease?

A)Lessor retains risk of breakage to leased asset.
B)Lessor has reward of high resale value.
C)Lessor does not have risk of change in demand for the leased asset.
D)Lessor does not have guaranteed residual value.

Question 15

Which will increase the "agency cost of leasing"?

A)Having a bargain purchase option in the lease agreement.
B)Having maintenance requirements for the leased asset.
C)Leasing assets that are easy to damage.
D)Having a guaranteed residual value by the lessee.

Question 16

What are the advantages to the lessee of leasing an asset, rather than purchasing it?

Question 17

Which statement is correct about the "guaranteed residual value"?

A)It is not included in the present value of the payment calculation.
B)Lessee assumes the risk of the property falling below the guaranteed amount.
C)Lessor assumes the risk of the property falling below the guaranteed amount.
D)It is a non-lease cost in the lease arrangement.

Question 18

What entry is required for the lessor in a finance lease?

A)Net investment in lease.
B)Rental income.
C)Interest expense.
D)Depreciation expense.

Question 19

Which statement is true?

A)The guaranteed residual value is provided by the lessor.
B)The bargain purchase option is not a part of the lease payment calculation.
C)The incremental borrowing rate is the interest rate that the lessor would have to pay on a similar lease or loan.
D)One of the risks of ownership is the risk of obsolescence.

Question 20

From the perspective of the lessor, which statement is correct respecting the criteria for determining whether a lease is an operating or a finance lease?

A)Substantially all of the risks and rewards of ownership have been transferred from the lessee to the lessor.
B)There is a transfer of ownership to the lessee or a bargain purchase option (BPO)at the end of the lease.
C)The lease term is a minor part of the economic life of the asset.
D)The present value of the lease payments is greater than 50% fair value of the leased asset.

Question 21

For the following lease, determine the amount the ROU asset will be initially measured at. $\begin{array}{|l|l|}\hline \text { Annual payment (due at end of year) } & \$ 23,104 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental borrowing rate } & 10 \% \\\hline \text { Implicit rate (not readily determinable by lessee) } & 8 \% \\\hline \text { Unguaranteed residual value } & \text { NA } \\\hline \text { Guaranteed residual value } & 20,000 \\\hline \text { Expected payout under guarantee } & 20,000 \\\hline\end{array}$

A)75,164
B)78,636
C)100,001
D)105,859

Question 22

For the following lease, determine the amount the ROU asset will be initially measured at.
$\begin{array}{|l|l|}\hline \begin{array}{l}\text { Annual payment (due at end of } \\\text { year) }\end{array} & \$ 25,000 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental borrowing rate } & 7 \% \\\hline \begin{array}{l}\text { Implicit rate (readily } \\\text { determinable by lessee) }\end{array} & 6 \% \\\hline \begin{array}{l}\text { Non-lease costs included in } \\\text { annual payment }\end{array} & 2,000 \\\hline\end{array}$

A)94,305
B)96,884
C)102,505
D)105,309

Question 23

Under ASPE, which statement is correct for the lessee?

A)Using the higher of the incremental or implicit rate maximizes the present value of the minimum lease payment calculation.
B)Using the lower of the incremental or implicit rate maximizes the present value of the minimum lease payment calculation.
C)Using the incremental borrowing rate maximizes the minimum lease payment calculation.
D)Using the implicit rate maximizes the minimum lease payment calculation.

Question 24

Under IFRS, assuming all information is available, which rate is used by the lessee in the minimum lease calculation?

A)Implicit borrowing rate.
B)Lessee's incremental borrowing rate.
C)Lower of the incremental and implicit rate.
D)Either the incremental or implicit rate.

Question 25

Under ASPE, assuming all information is available, which rate is used by the lessee in the lease present value calculations?

A)Implicit borrowing rate.
B)Lessee's incremental borrowing rate.
C)Lower of the incremental and implicit rate.
D)Either the incremental or implicit rate.

Question 26

Under ASPE, which statement is correct for the lessee?

A)If the present value of the minimum lease payments exceeds the fair value of the leased asset, the asset will be recorded on the balance sheet at the higher amount.
B)If the present value of the minimum lease payments exceeds the fair value of the leased asset, the asset will be recorded on the balance sheet at the fair value amount.
C)If the present value of the minimum lease payments is lower that the fair value of the leased asset, the asset will be recorded on the balance sheet at the unguaranteed residual value amount.
D)If the present value of the minimum lease payments is lower that the fair value of the leased asset, the implicit rate must be used.

Question 27

For the following lease, determine the amount the ROU asset will be initially measured at assuming that the company does not elect to use the practical expedient available to it.
$\begin{array}{|l|l|}\hline \begin{array}{l}\text { Annual payment (due at end of } \\\text { year) }\end{array} & \$ 22,000 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental borrowing rate } & 10 \% \\\hline \begin{array}{l}\text { Implicit rate (not readily } \\\text { determinable by lessee) }\end{array} & 8 \% \\\hline \begin{array}{l}\text { Non-lease costs included in } \\\text { annual payment }\end{array} & 5,000 \\\hline\end{array}$

A)64,443
B)67,876
C)83,397
D)87,840

Question 28

For the following lease, determine the amount the ROU asset will be initially measured at.
$\begin{array}{|l|l|}\hline \text { Annual payment (due at end of year) } & \$ 23,150 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental borrowing rate } & 8 \% \\\hline \text { Implicit rate (readily determinable by lessee) } & 6 \% \\\hline \text { Guaranteed residual value } & 10,000 \\\hline \text { Expected payout under guarantee } & 10,000 \\\hline\end{array}$

A)92,431
B)97,516
C)99,237
D)104,989

Question 29

What is the implicit rate?

A)The interest rate that the lessor would have to pay on a similar lease or loan.
B)The interest rate that the lessee would have to pay on a similar lease or loan.
C)The risk adjusted interest rate from the cash flow stream expected by the lessor.
D)The risk adjusted interest rate from the cash flow stream expected by the lessee.

Question 30

Under ASPE, what is the meaning of "minimum lease payments"?

A)Payments over the lease term including non-lease costs.
B)Payments over the lease term excluding non-lease costs.
C)Payments over the lease term until the bargain purchase option is exercised.
D)Payments over the lease term until guaranteed residual value is received.

Question 31

For the following lease, determine the amount the ROU asset will be initially measured at.
$\begin{array}{|l|l|}\hline \begin{array}{l}\text { Annual payment (due at commencement date of } \\\text { lease) }\end{array} & \$ 23,000 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental borrowing rate } & 10 \% \\\hline \text { Implicit rate (readily determinable by lessee) } & 8 \% \\\hline \text { Unguaranteed residual value } & \text { NA } \\\hline \text { Guaranteed residual value } & 20,000 \\\hline \text { Expected payout under guarantee } & 14,000 \\\hline\end{array}$

A)93,792
B)103,792
C)107,794
D)108,759

Question 32

Why are there special accounting rules for sale-leaseback transactions?

Question 33

List four factors that preclude the seller-lessee from recognizing a sale on a sale and leaseback transaction.

Question 34

For the following lease, determine the amount the ROU asset will be initially measured at.
$\begin{array}{|l|l|}\hline \begin{array}{l}\text { Annual payment (due on commencement date } \\\text { of lease) }\end{array} & \$ 30,000 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental borrowing rate } & 10 \% \\\hline \text { Implicit rate (not readily determinable by lessee) } & 8 \% \\\hline \text { Guaranteed residual value } & 28,000 \\\hline \text { Expected payout under guarantee } & 15,000 \\\hline\end{array}$

A)123,037
B)134,410
C)139,573
D)142,482

Question 35

For the following lease, determine the amount the ROU asset will be initially measured at.
$\begin{array}{|l|l|}\hline \text { Annual payment (due at end of year) } & \$ 23,000 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental borrowing rate } & 10 \% \\\hline \text { Implicit rate (readily determinable by lessee) } & 8 \% \\\hline \text { Unguaranteed residual value } & \mathrm{NA} \\\hline \text { Guaranteed residual value } & 25,000 \\\hline \text { Expected payout under guarantee } & 0 \\\hline\end{array}$

A)91,832
B)102,711
C)105,444
D)108,846

Question 36

Under ASPE, what are executory costs?

A)Maintenance costs that are applicable to only operating leases.
B)Maintenance costs that are incurred only when the asset is leased.
C)Maintenance costs that are incidental costs in a lease that would be incurred by the lessee independent of whether the lessee had purchased or leased the asset.
D)Maintenance costs that are applicable to only finance leases.

Question 37

For the following lease, determine the amount the ROU asset will be initially measured at.
$\begin{array}{|l|l|}\hline \begin{array}{l}\text { Annual payment (due at commencement date of } \\\text { lease) }\end{array} & \$ 23,000 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental borrowing rate } & 10 \% \\\hline \text { Implicit rate (readily determinable by lessee) } & 8 \% \\\hline \text { Unguaranteed residual value } & \text { NA } \\\hline \text { Guaranteed residual value } & 20,000 \\\hline \text { Expected payout under guarantee } & 14,000 \\\hline\end{array}$

A)101,360
B)104,600
C)108,707
D)112,791

Question 38

For the following lease, determine the amount the ROU asset will be initially measured at.
$\begin{array}{|l|l|}\hline \text { Annual payment (due at end of year) } & \$ 22,000 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental borrowing rate } & 10 \% \\\hline \text { Implicit rate (not readily determinable by lessee) } & 8 \% \\\hline \text { Unguaranteed residual value } & 15,000 \\\hline\end{array}$

A)83,397
B)92,711
C)98,048
D)102,304

Question 39

For the following lease, determine the amount the ROU asset will be initially measured at.
$\begin{array}{|l|l|}\hline \text { Annual payment (due at end of year) } & \$ 22,000 \\\hline \text { Lease term } & 5 \\\hline \text { Incremental borrowing rate } & 10 \% \\\hline \text { Implicit rate (not readily determinable by lessee) } & 8 \% \\\hline \text { Unguaranteed residual value } & 15,000 \\\hline \text { Bargain purchase option } & 5,000 \\\hline\end{array}$

A)86,502
B)91,243
C)95,816
D)101,451

Question 40

Discuss what is meant by the risk-adjusted rate and which risk adjusted rates the lessee and the lessor should use?

Question 41

Describe the rationale for the seller-lessee deferring gains or losses on sale-leaseback transactions when the revenue recognition criteria detailed in IFRS 15 have been met.

Question 42

Describe how the buyer-lessor accounts for a sale and leaseback transaction when the sales criteria are not met.

Question 43

Describe how the seller-lessee amortizes gains on a sale-leaseback transaction that qualifies as a sale.