Deck 14: Leases

Question 1

Which of the following is included within the scope of AASB 117?

A) lease agreements for motion picture films
B) lease agreements to explore for minerals
C) lease agreements for biological assets
D) lease agreement for an oil refinery

Answer 1

D

Question 2

Timely Limited accepts a lease incentive to enter into a 4-year operating lease for equipment. The incentive is cash amounting to $10 000 that will be paid on the date the lease agreement is signed. On inception of the lease, the lessor will record:

A) $\begin{array} { l l l } \mathrm { DR } & \mathrm { Cash } & \$ 10000 \\\mathrm { CR } & \text { Incentive to lessee } &\$ 10000 \end{array}$
B) $\text { DR\quad Incentive to lessee } \quad \$ 10000$
$\begin{array}{lll}C R & \text { Cash } & \$ 10000\end{array}$
C) $\text { DR\quad Rent income } \quad \$ 10,000$
$\text { CR } \quad \text { Rent expense } \quad \$ 10,000$
D) $\text { DR\quad Cash } \quad \$ 10000$
$\text { CR } \quad \text { Rent income } \quad \$ 10000$

Answer 2

$\text { DR\quad Incentive to lessee } \quad \$ 10000$
$\begin{array}{lll}C R & \text { Cash } & \$ 10000\end{array}$

Question 3

Burgess Limited accepts a lease incentive to enter into a 3-year operating lease for a building. The incentive is a cash amount of $5000 received on signing of the lease agreement. The lessee initially records this transaction as follows:

A) $\begin{array} { l c c } \text { DR } & \text { Lease expense } & \$ 5000 \\\text { CR } & \text { Cash } & \$ 5000\end{array}$
B) $\begin{array} { l c c } \text { DR } & \text { Incentive from lessor } & \$ 5000 \\\text { CR } & \text { Cash } & \$ 5000\end{array}$
C)DR $\quad$ Incentive to lessee $\quad$ $\$ 5000$
CR $\quad$ Rent income $\quad$$\$ 5000$
D) $\text { DR\quad Cash } \quad\quad\quad\$ 5000$
$\text { CR } \quad \text { Lease incentive from lessor }\quad \$ 5000 \text {. }$

Answer 3

$\text { DR\quad Cash } \quad\quad\quad\$ 5000$
$\text { CR } \quad \text { Lease incentive from lessor }\quad \$ 5000 \text {. }$

Question 4

The main concerns about the current accounting standard relating to leases include:
I the dividing line between finance and operating leases is hard to define in a principled way
II obligations under cancellable operating leases are little different from borrowings, but are not recognised as liabilities
III assets used in the business that are held under operating leases are not shown on the statement of financial position, thereby understating return on assets
IV leases are scoped out of the financial instruments standards, leading to inconsistencies between leases and similar transactions

A) I and II
B) II and III
C) III and IV
D) I and IV

Question 5

In relation to finance leases, the following information must be disclosed separately in the financial statements of lessors:
I Unearned finance income.
II Contingent rents recognised as income in the period.
III The unguaranteed residual values accruing to the benefit of the lessee.
IV The accumulated allowance for uncollectible minimum lease payments receivable.

A) I, II and IV only
B) I, III and IV only
C) II, III and IV only
D) II and IV only.

Question 6

Which of the following is NOT an example of a risk of ownership of an asset?

A) idle capacity
B) gains on the eventual sale of the asset
C) uninsured damage
D) technical obsolescence

Question 7

With respect to operating leases, lessors are required under AASB 117 Leases, to make the following disclosures:
I Total contingent rents recognised as income in the period.
II Future minimum lease payments under individual, cancellable operating leases, separately.
III A general description of the lessee's leasing arrangements.
IV Future minimum lease payments under non-cancellable operating leases in aggregate.

A) I, II and III only
B) I, III and IV only
C) II and III only
D) I, II and IV only.

Question 8

The following information relates to questions

Adam Limited and Davies Limited enter into a finance lease agreement with the following terms:

? lease term is 3 years
? estimated economic life of the leased asset is 6 years
? 3 × annual rental payments of $23 000 each payment is one year in arrears
? residual value at the end of the lease term is not guaranteed by the lessee
? interest rate implicit in the lease is 7%


-On inception date, the present value of the minimum lease payments is:

A) $60 359
B) $64 170
C) $64 584
D) $69 000

Question 9

A lessee when accounting for a lease incentive received under an operating lease treats is as a:

A) increase in rental income over the lease term
B) increase in rental expense over the lease term
C) reduction in rental expense over the lease term
D) reduction in rental income over the lease term

Question 10

Nelson Ltd manufactures specialised machinery for both sale and lease. On 1 July
2013, Nelson leased a machine to Poggi Ltd. The machine cost Nelson Ltd
$195 000 to manufacture, and its fair value at the inception of the lease was
$212 515. The interest rate implicit in the lease is 10%, which is in line with current market rates. Under the terms of the lease, Poggi Ltd has guaranteed $25 000 of the asset's expected residual value of $37 000 at the end of the 5-year lease term. The debit to the sales revenue account in Nelson's books is:

A) $187 548
B) $195 000
C) $205 063
D) $212 515

Question 11

The minimum lease payment is defined as including all of the following components except:

A) bargain purchase option
B) contingent rentals
C) a guaranteed residual value
D) the lease payments occurring over the lease term

Question 12

A finance lease is an agreement between an owner of an asset and a user of that asset wherein the:

A) legal title to property is transferred to the lessee when the first lease payment is made
B) ownership passes to the lessor on inception date of the lease
C) substantially all of the risks and benefits of ownership remain with the lessor
D) usual risks and benefits of ownership are transferred to the user

Question 13

Which of the following is NOT one of the situations provided in AASB 117 in relation to the classification of leases as finance leases?

A) Losses from the fluctuation of the fair value of the residual accrue to the lessee
B) Leased assets are of a specialised nature
C) The lessee has provided a guarantee that they will acquire the asset at the end of the lease term
D) The lease is for a major part of the economic life of the asset.

Question 14

On 30 June 2013, Mala Ltd leased a vehicle to Tango Ltd. Mala Ltd had purchased the vehicle on that day for its fair value of $89 721. The lease agreement cost Mala Ltd
$1457 to have drawn up and requires Tango to reimburse Mala for annual insurance costs of $1050. The amount recorded as a lease receivable by Mala Ltd at the inception of the lease is:

A) $88 264
B) $89 721
C) $90 771
D) $91 178

Question 15

Which of the following is an appropriate journal entry for the initial recognition by a lessee of a finance lease arrangement?

A) DR Leased asset: CR Bank loan
B) DR Cash: CR Leased asset
C) DR Lease liability: CR Leased asset
D) DR Leased asset: CR Lease liability

Question 16

The following information relates to questions

Adam Limited and Davies Limited enter into a finance lease agreement with the following terms:

? lease term is 3 years
? estimated economic life of the leased asset is 6 years
? 3 × annual rental payments of $23 000 each payment is one year in arrears
? residual value at the end of the lease term is not guaranteed by the lessee
? interest rate implicit in the lease is 7%


-The journal entry recorded by the lessee when the payment is made at the end of the first year is:

A) $\begin{array} { l l r r } \mathrm { Dr } & \text { Interest expense } & 4225 & \\\mathrm { Dr } & \text { Lease liability } & 18775 & \\\mathrm { Cr } & \text { Cash } & & 23000\end{array}$
B) $\begin{array} { l l r r } \text { Dr } & \text { Lease liability } & 4225 & \\\mathrm { Dr } & \text { Interest expense } & 18775 & \\\mathrm { Cr } & \text { Cash } & & 23000\end{array}$
C) $\begin{array} { l l r r } \text { Dr } & \text { Interest expense } & 1610 & \\\mathrm { Dr } & \text { Lease liability } & 21390 & \\\mathrm { Cr } & \text { Cash } & & 23000\end{array}$
D) $\begin{array}{llr}\mathrm{Dr} & \text { Lease liability } & 1,610 \\\mathrm{Dr} & \text { Interest expense } & 21,390\\\mathrm{Cr} &\text { Cash }&23,000\end{array}$

Question 17

If a sale and leaseback transaction results in a finance lease, AASB 117 Leases, provides the following accounting treatment for any excess of sales proceeds over the carrying amount:

A) recognise directly in retained earnings of the seller-lessee
B) immediately recognise as income by the seller-lessee
C) defer and amortise over the lease term
D) include in the capitalised amount of the leased asset.

Question 18

The user of a leased asset is referred to as the:

A) vendor
B) purchaser
C) lessor
D) lessee

Question 19

Under AASB 117 Leases, lessors are required to account for lease receipts from operating leases as:

A) revenue, on a reducing balance basis over the lease term
B) income, on inception date of the lease
C) income, on a straight-line basis over the lease term
D) revenue, at the end of the lease term.

Question 20

The following information relates to questions

Adam Limited and Davies Limited enter into a finance lease agreement with the following terms:

? lease term is 3 years
? estimated economic life of the leased asset is 6 years
? 3 × annual rental payments of $23 000 each payment is one year in arrears
? residual value at the end of the lease term is not guaranteed by the lessee
? interest rate implicit in the lease is 7%


-The period over which the asset should be depreciated by the lessee is:

A) 3 years
B) 6 years
C) the rate as determined by the Commissioner of Taxation
D) cannot be determined from the information provided

Question 21

Which of the following is an appropriate journal entry for the initial recognition by a lessee of an operating lease arrangement?

A) DR Leased asset: CR Lease liability
B) DR Lease rental expense: CR Cash/Accounts payable
C) DR Leased asset: CR Cash/Accounts payable
D) DR Lease asset: CR Lease interest expense

Question 22

Which of the following is NOT a reason given by the IASB to remove the requirement to classify leases from any future accounting standard?

A) All leases give rise to a right to use the leased item that meets the definition of an asset; a single conceptual model to account for all leases is preferable.
B) The removal of classification would result in a simpler accounting standard.
C) Removing the classification may result in inconsistencies in how the minimum lease payments are determined for classification purposes.
D) Removal of classification would result in similar transactions being accounted for in the same way.

Question 23

AASB 117 requires manufacturer and dealer lessors to recognise selling profit or loss at the:

A) end of the lease
B) systematically recognised over the lease term
C) commencement of the lease
D) 50% at commencement of the lease and 50% at the end of the lease

Question 24

Which of the following is an appropriate journal entry for the initial recognition by a lessor of a finance lease arrangement?

A) DR Lease receivable: CR Asset
B) DR Lease receivable: CR Lease liability
C) DR Leased asset: CR Cash/Accounts payable
D) DR Leased asset: CR Cash