Deck 11: Accounting for Leases

Question 1

What is a requirement listed in AASB 16 that addresses the exception of all leases to be listed on the balance sheet?

A) A right-of-use asset must be recognised
B) A lease liability must be recognised
C) Underlying asset is of low value
D) No exceptions are listed in AASB 16

Answer 1

C

Question 2

What is required in AASB 16 that are critical to the implementation of the standard?

A) Identifying whether the contract contains a lease
B) Separating the components of the contract
C) Both A and B
D) Neither A nor B

Answer 2

A

Question 3

What is the maximum term of a short-term lease?

A) Six months
B) Two years
C) Twelve months
D) Three months

Answer 3

C

Question 4

What is defined as the non-cancellable period for which the lessee has a right to use an underlying asset?

A) Lease term
B) Lessor's rights
C) Lessee's rights
D) Bargain-purchase window

Question 5

How is the lessee to measure the lease liability after the commencement date.

A) Increasing the carrying amount to reflect interest on the lease liability
B) Reducing the carrying amount to reflect the lease payment made
C) Remeasuring the carrying amount to reflect any reassessment or lease modifications
D) All the above are measurement requirements

Question 6

Which type of lease is not applicable to AASB 16 'Leases'?

A) Leases to explore for or use mineral, oil, or natural gas
B) Service concession arrangements within the scope of Interpretation 12 'Service Concessions Arrangements'
C) Rights held by a lessee under licensing agreements within the scope of AASB 138 'Intangible Assets'
D) All of the above are excluded from AASB 16 'Leases'

Question 7

How is a finance lease distinguished from an operating lease?

Question 8

Managers will often have strong incentives to favour operating leases over finance leases.This is because:

A) operating leases are recorded on the balance sheet. This results in an increased debt ratio and a lower return on total assets
B) finance leases are recorded on the balance sheet. This results in a decreased debt ratio and a lower return on total assets
C) finance leases are recorded on the balance sheet. This results in an increased debt ratio and a lower return on total assets
D) None of the above. Managers do not prefer operating leases

Question 9

The viewpoint that assets and liabilities should be recognised in the accounts of the lessee is known as:

A) The lease capitalization approach
B) The operating lease approach
C) The financing lease approach
D) The fair value approach

Question 10

Which of the following is not a lease disclosure requirement regarding the statement of cash flows?

A) Cash payments for the principal portion of the lease liability within financing activities
B) Cash payments for the interest portion of the lease liability as interest paid
C) Short-term lease payments and payments for leases of low-value assets
D) Disclosure of which line items include the right-of-use assets

Question 11

What is the result of the on-balance sheet treatment of a lease?

A) Increased return on total assets and decreased debt ratio
B) Increased earnings per share and decreased debt ratio
C) Increased return on total assets and increased debt ratio
D) Decreased return on total assets and increased debt ratio

Question 12

List and explain the different items set out in a typical lease agreement.

Question 13

Which of the following is a factor considered by the lessor at the commencement date regarding the possible termination of a lease?

A) The importance of the underlying asset to the lessee's operation
B) The amount of any fixed payments
C) The importance of the underlying asset to the lessor's lease revenue
D) Purchase options that are significantly above market rates

Question 14

Operating leases are commonly referred to as ________ while capital leases are also known as ________ leases.

A) on-balance sheet; off-balance sheet
B) finance; on-balance sheet
C) off-balance sheet; on-balance sheet
D) on-balance sheet; finance

Question 15

Which of the following is not expected to have the potential to be affected by the new leasing approach being developed by IFRS 16?

A) Lease disclosure requirements
B) Debt covenants
C) Regulatory capital requirements
D) Tax and dividend payments

Question 16

What is a possible future event that can be excluded toward a supplier's substantive substitution rights?

A) A change in the expected useful life of the asset to the lessor
B) The introduction of new technology that is not substantially developed at the inception of the contract
C) A change in the amount in the minimum lease payments
D) An agreement to pay a below-market rate for the use of the assets

Question 17

A typical lease agreement will always set out all of the following except:

A) who is responsible for the payment of maintenance and repair costs, insurance and taxes
B) that the lease is non-cancellable by either party
C) the amount and timing of the lease (rental) payments
D) the period of the lease

Question 18

What are the two elements in identifying whether a contract contains a lease?

A) The type of lease and the identified asset
B) The identified asset and the minimum lease payments
C) Identified asset and the right to control the use of an identified asset
D) The type of lease and the minimum lease payments

Question 19

Discuss the implications of the proposal that operating/finance lease distinction be dropped.

Question 20

What are two components of the lease liability that are measured in terms of net present value?

A) Expected guaranteed residual value and estimated cost of dismantling and restoring the asset
B) Expected guaranteed residual value and variable payments (indexed)
C) Termination penalty if reasonably certain and the lessee's initial direct costs
D) The lessee's initial direct costs and the payment at or before commencement date less any incentives received

Question 21

How is the lessor required to classify each lease?

A) Operating lease
B) Finance lease
C) Either A or B is acceptable
D) Neither A nor B is acceptable

Question 22

Consider the following statements:
A sale-and-leaseback transaction,as far as the seller is concerned,can
(a) generate neither a profit nor a loss
(b) can generate an immediate profit but not a deferred profit
(c) can generate a deferred profit but not an immediate profit
(d) can generate an immediate loss but not a deferred loss

A) All are correct
B) Only (a) is correct
C) Only (b) and (d) are correct
D) All are incorrect

Question 23

For the lessor,what determines the presentation of the asset in the financial statements?

A) Length of the lease term
B) The type of lease
C) Amount of the guaranteed minimum lease payments
D) Depreciation method of the lessee

Question 24

What term is used to describe the right of the lessee to purchase the underlying asset when the option becomes exercisable at a price well below the estimated fair value at that time.

A) Bargain purchase option
B) Residual value guarantee
C) Unguaranteed residual value
D) Minimum lease payment

Question 25

Which of the following is not a disclosure related to finance leases?

A) Lease income
B) Selling profit or loss
C) Finance income on the net investment in the lease
D) A maturity analysis of the lease payments receivable

Question 26

A sale of goods under a sale-and-leaseback agreement is usually treated by accountants as a sale when the agreement is signed because:

A) the goods are physically transferred to the buyer when the agreement is signed
B) hire-purchase agreements are usually for a 12-month term
C) accountants are more interested in the economic substance of a transaction than in its legal form
D) ownership of the goods passes to the buyer when the agreement is signed

Question 27

What are the main characteristics of a sale-and-leaseback agreement?

Question 28

Bellamy Pty Ltd enters into a sale-and-leaseback arrangement as follows:
$$\begin{array} { l l } \text { Carrying amount of asset } & \$ 50000 \\\text { Fair value of asset } & \$ 40000 \\\text { Proceeds from sale of asset } & \$ 44000\end{array}$$
The resulting lease is classified as an operating lease.According to AASB 117,Bellamy should make the following entry(ies):

A)
$\begin{array}{lrr}\text { Dr Cash at Bank } & \$ 44000 & \\\text { Dr Deferred Loss on Sale } & \$ 6000 & \\\quad \text { Cr. Asset } & & \$ 50000\end{array}$

B)
$\begin{array}{lrr}\text { Dr Cash at Bank } & \$ 44000 & \\\text { Dr Deferred Loss on Sale } & \$ 6000 & \\\quad \text { Cr Asset } & & \$ 50000\end{array}$


C) $$\begin{array} { l r r } \text { Dr Loss on Revaluation } & \$ 6000 & \\\quad \text { Cr Asset } & & \$ 6000 \\\text { Dr Cash at Bank } & \$ 44000 & \\\quad \text { Cr Asset } & & \$ 44000\end{array}$$
D)
$\begin{array}{l}\text { Dr Loss on Revaluation } &\$ 10000 \\\quad \text { Cr Asset }& &\$ 10000 \\\text { Dr Cash at Bank } &\$44000\\\quad \text { Cr Deferred gain on Sale } & &\$44000\\\quad \text { Cr Asset } &&\$40000\end{array}$ .

Question 29

What is a transition provision option for lessees according to AASB 16?

A) Apply AASB retrospectively to each prior reporting period presented
B) Apply the prospective 'cumulative catch-up' approach
C) Both A and B are acceptable transition provision options
D) Neither A nor B are considered transition provision options

Question 30

What is defined as the sum of the lease payments received by a lessor under a finance lease and any unguaranteed residual value accruing to the lessor?

A) Net investment in the lease
B) Lease receivable
C) Gross investment in the lease
D) Guaranteed minimum lease payment

Question 31

Tomfoolery Ltd enters into a sale-and-leaseback arrangement for an aircraft it owns.The resulting lease is classified as a finance lease.The details are as follows:
$$\begin{array} { l l } \text { Carrying amount of asset } & \$ 50000 \\\text { Proceeds from sale of asset } & \$ 60000 \\\text { Annual lease payment amount } & \$ 8000\end{array}$$
According to AASB 117,Tomfoolery should make which of the following entries to record the sale:

A)
$\begin{array}{ll}\text { Dr Cash at bank } & \$ 60000 \\\text { Cr Aircraft } && \$ 50000 \\\text { Cr Deferred gain on sale } && \$ 10000\\\text {Dr Aircraft under lease}&\$ 60000\\\text { Crlease liability }&&\$ 60000\end{array}$

B)
$\begin{array} { l l l } \text { Dr Air craft } & \$ 60000 \\\text { Cr Cash at bank } & & \$ 50000 \\\text { Cr Deferred gain on sale } & & \$ 10000\end{array}$

C)
$\begin{array} { l l l } \text { Dr Cash at bank } & \$ 60000 & \\\text { Cr Air craft } & & \$ 50000 \\\text { Cr Gain on sale income } & & \$ 10000 \\\text { Dr Air craft under lease } & \$ 60000 & \\\text { Cr Lease liability } & & \$ 60000\end{array}$

D) No entry is required as Tomfoolery will still own the asset in an economic sense

Question 32

What additional issues are addressed by leases entered into by manufacturers or dealers?

A) Presentation and disclosure
B) Measurement and recognition
C) Classification and recognition
D) Disclosure and measurement

Question 33

For which party are adjustments required on transition?

A) Lessees
B) Lessors
C) Both parties
D) Neither parties