Question 1

A lease conveys the right to use an asset and legal ownership for the duration of the lease.

Accepted Answer

A lease conveys the right to use an asset for a specified period, but legal ownership remains with the lessor, not the lessee.

Question 2

When calculating the present value of lease payments fi the implicit rate is not available what rate should be used?&#10;A)LIBOR&#10;B)weighted average cost of capital&#10;C)incremental borrowing rate&#10;D)industry average rate

Accepted Answer

The incremental borrowing rate should be used when the implicit rate is not available. This rate represents the rate at which the company would be able to borrow funds to purchase the same asset and is often provided by the lessor or can be estimated by the lessee based on their own creditworthiness. LIBOR, weighted average cost of capital, and industry average rate may not accurately reflect the specific borrowing costs and creditworthiness of the lessee.

Question 3

To which of the following does IAS 17 apply?&#10;A)investment property&#10;B)biological assets.&#10;C)specialised equipment such as refineries&#10;D)exploration rights

Accepted Answer

IAS 17 applies to leases, including those for specialized equipment such as refineries. It does not apply to investment property, biological assets, or exploration rights, as these are covered by other standards.

Question 4

The lease term is defined as;&#10;A)the period for which the lessee agreed.&#10;B)the non-cancellable term in the agreement.&#10;C)the non-cancellable term plus any possible extensions.&#10;D)the non-cancellable lease term plus any possible extensions that are reasonably likely to be taken up.

Accepted Answer

The lease term is typically defined as the non-cancellable term in the agreement, but some leases may include options for extension. In order to capture the full potential duration of the lease, it is appropriate to include any possible extensions that are reasonably likely to be taken up. Therefore, choice D is the best answer as it takes into account both the non-cancellable lease term and any possible extensions.

Question 5

Under IAS 17 a lease is classified as a finance lease if it transfers more than 90% the risks and rewards incidental to ownership.

Accepted Answer

Under IAS 17, a lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership, but there is no specific 90% threshold mentioned in the standard for this determination.

Question 6

Lessors should recognize assets held under a finance lease in their balance sheets and present them as a receivable at an amount equal to the net investment in the lease.

Accepted Answer

According to IFRS 16, lessors are required to recognize assets held under a finance lease in their balance sheets and present them as a receivable at an amount equal to the net investment in the lease.

Question 7

A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset.

Accepted Answer

A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset, and is therefore recognized as a form of borrowing by the lessee. In contrast, an operating lease is a lease where the lessor retains such risks and rewards.

Question 8

Which of the following is not a factor affecting contingent rent?&#10;A)passage of time&#10;B)amount of usage&#10;C)percentage of sales&#10;D)future price indices

Accepted Answer

Contingent rent is typically influenced by factors such as amount of usage, percentage of sales, and future price indices, which are variable elements. The passage of time, however, is a constant factor and does not affect contingent rent.

Question 9

Net investment in the lease is the gross investment in the lease discounted at the interest rate prevailing in the market at the time of commencing the lease.

Accepted Answer

Net investment in the lease is the gross investment in the lease discounted at the interest rate implicit in the lease, not the prevailing market rate.

Question 10

A machine has a useful life of 4 years and a cash value of €12,000.Company A leases the machine for €300 per month in advance and the lease is cancellable.Company B leases the machine for 8 half yearly payments in advance of €2,250.Company C leases the machine for 6 half yearly payments in advance of €1,800.Company D leases the machine for 4 half yearly payments in advance of €1,250.Which of these should be classified as a finance lease?

A)Company A
B)Company B
C)Company C
D)Company D

Accepted Answer

According to IAS 17, a lease is considered a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an asset. In this case, only Company B pays a total of €18,000 (8 half-yearly payments of €2,250) which is equal to the cash value of the machine. This indicates that Company B is committed to paying the entire value of the asset, and therefore, it is classified as a finance lease. Companies A, C, and D pay less than the cash value and have cancellable lease agreements, indicating that they do not assume the risks and rewards incidental to ownership and are therefore operating leases.

Deck 16: Leases