Question 1

Features of lease agreements that can be manipulated to support the lease being classified as an operating lease include:

Accepted Answer

All three features - bargain price options, economic life estimates, and residual values - can be manipulated to support the lease being classified as an operating lease. Bargain price options can result in lower lease payments, making the lease more similar to a rental agreement (typical of an operating lease), rather than a purchase agreement (typical of a finance lease). Economic life estimates can be used to ensure that the lease term is significantly shorter than the asset's expected useful life, which is a characteristic of an operating lease. Finally, residual values - the estimated value of the asset at the end of the lease term - can be artificially inflated to ensure that the lessee is not obligated to purchase the asset at the end of the lease, thus supporting the lease being classified as an operating lease.

Question 2

Initial direct costs incurred by a manufacturer or dealer lessor effectively are recognised as:

Accepted Answer

Initial direct costs are costs incurred by the manufacturer or dealer lessor that are directly attributed to a specific lease transaction, such as origination, credit checks, and commissions. They are included in the calculation of the profit or loss on sale because they directly impact the profits earned from the sale of the asset on lease. Therefore, they are recognised as part of the profit or loss on sale.

Question 3

Assets that are leased under an operating lease should be:

Accepted Answer

According to the accounting standard IAS 17, assets leased under an operating lease should be regarded as an operating activity by lessees, and lease payments should be charged to profit and loss on a systematic basis. The assets should not be recognised as assets on the balance sheet and should not be depreciated by the lessee.

Question 4

According to AASB 117 Leases,the payments made under a finance lease over the lease term must be divided and allocated into four components.Which of the following is NOT one of the relevant components?

Accepted Answer

Receipt of lease incentives is not a component of the payments made under a finance lease according to AASB 117. The relevant components include reduction of the lease liability, interest expense incurred, and reimbursement of lessor costs.

Question 5

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

Accepted Answer

Under AASB 117, lessors are required to account for lease receipts from operating leases as income on a straight-line basis over the lease term. This means that the income is recognized in equal amounts over the lease term, rather than being front-loaded or recognized at the end of the lease term. This method ensures a more accurate representation of the lessor's earning pattern over the lease term.

Question 6

Interpretation 4 Determining Whether an Arrangement Contains a Lease provides that the following arrangements which are not in the legal form of a lease may in fact fall within the definition of a lease for accounting purposes,except for:

Accepted Answer

Non-cancellable service agreements do not meet the definition of a lease because they do not convey the right to control the underlying asset. The other options listed may contain elements of a lease arrangement and therefore require analysis under the lease accounting standard.

Question 7

On 30 June 2015,Malta Ltd leased a vehicle to Tango Ltd.Malta Ltd had purchased the vehicle on that day for its fair value of $75 625.The lease agreement cost Malta Ltd $1200 to have drawn up and requires Tango to reimburse Malta for annual insurance costs of $945.The amount recorded as a lease receivable by Malta Ltd at the inception of the lease is:

Accepted Answer

The answer of On 30 June 2015,Malta Ltd leased a...

Question 8

AASB 117 defines a non-cancellable lease to mean a lease that is cancellable in limited circumstances only if:

Accepted Answer

According to AASB 117, a non-cancellable lease is a lease that cannot be canceled by the lessee or the lessor, except in the occurrence of some remote contingency (such as the destruction of the leased asset) that is not expected to happen during the lease term. Therefore, option B is the correct answer as it states the limited circumstances under which a non-cancellable lease can be canceled.

Question 9

When depreciating a leased asset which it expects to buy,a lessee will use which of the following calculations to determine the annual depreciation amount?

Accepted Answer

The lessee will use the depreciable amount of the leased asset (which is the cost less estimated residual value) divided by the useful life of the asset to determine the annual depreciation amount. This calculation considers the fact that the lessee expects to purchase the asset at the end of the lease term and therefore will need to continue depreciating the asset once it becomes owned.

Question 10

Which of the following statements is incorrect?

Accepted Answer

Recognizing future lease payments as liabilities increases liabilities, which unfavorably affects gearing ratios, not favorably.

Question 11

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:

Accepted Answer

In a sale and leaseback transaction resulting in a finance lease, any excess of sales proceeds over the carrying amount is deferred and amortised over the lease term according to AASB 117.

Question 12

The following information relates to a lease between Canneries Limited (lessor)and Fruiterers Limited (lessee).3 lease payments of $20 000 each are made annually in advance and a final lease payment of $15 000 is made at the end of the 3 year lease term.The implicit interest rate is 10%.The amount of the interest expense that is recognised when the second payment of the lease is paid is:

Accepted Answer

The interest expense for the second payment is calculated on the outstanding lease liability after the first payment. The first payment reduces the principal, and interest is then calculated on the remaining balance at 10%.

Question 13

With respect to operating leases,lessors are NOT required under AASB 117 Leases,to disclose:

Accepted Answer

Future minimum lease payments under cancellable operating leases are not required to be disclosed separately under AASB 117 Leases.

Question 14

With respect to finance leases,lessors are required under AASB 117 Leases,to disclose:

Accepted Answer

AASB 117 requires lessors to disclose unguaranteed residual values accruing to their benefit, as it impacts the calculation of the lease receivable and income recognition.

Question 15

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

Accepted Answer

Gains on the eventual sale of the asset are not considered a risk of ownership, but rather a potential benefit or return on investment. A risk of ownership refers to potential negative outcomes or losses associated with owning an asset. Uninsured damage, idle capacity and technical obsolescence are all examples of risks of ownership.

Question 16

A lessee when accounting for a lease incentive received under an operating lease treats it as a(n):

Accepted Answer

A lease incentive received under an operating lease is treated as a reduction in rental expense over the lease term. This is because the lessor is effectively reducing the cost of the lease for the lessee by providing a financial incentive, which lowers the overall cost of the lease for the lessee. As a result, the lessee can reduce their rental expense over the lease term.

Question 17

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

Accepted Answer

AASB 117 deals with accounting for leases, including both finance leases and operating leases. The lease agreement for an oil refinery would fall within the scope of this standard. Lease agreements for biological assets and lease agreements to explore for minerals may be subject to other accounting standards, such as AASB 141 Agriculture or AASB 6 Exploration for and Evaluation of Mineral Resources. Licensing agreements for motion picture films are not leases and would not be covered by AASB 117.

Question 18

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

Accepted Answer

All of the other situations listed (A, B, and D) are provided in AASB 117 as factors that may indicate a lease should be classified as a finance lease. However, the provision of a guarantee that the lessee will acquire the asset at the end of the lease term is not one of the situations listed.

Quiz 10: Leases