Deck 8: Leases

Question 1

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

Answer 1

C

Question 2

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

Answer 2

B

Question 3

Explain what a lease is.

Answer 3

A lease is an arrangement in which the owner of an asset (the lessor)conveys to the user of the asset (the lessee)the exclusive right to use the asset for an agreed period of time in return for a series of cash payments.

Question 4

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)DR Cash $10 000 CR Incentive to lessee $10 000
B)DR Incentive to lessee $10 000 CR Cash $10 000
C)DR Rent income $10 000 CR Rent expense $10 000
D)DR Cash $10 000 CR Rent income $10 000

Question 5

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 6

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

Question 7

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)DR Lease expense $5000 CR Cash $5000
B)DR Incentive from lessor $5000 CR Cash $5000
C)DR Incentive to lessee $5000 CR Rent income $5000
D)DR Cash $5000 CR Lease incentive from lessor $5000.

Question 8

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 9

Nelson Ltd manufactures specialised machinery for both sale and lease.On 1 July
2012,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 10

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 11

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

A)Dr Interest expense 4 225 Dr Lease liability 18 775
Cr Cash 23 000
B)Dr Lease liability 4 225 Dr Interest expense 18 775
Cr Cash 23 000
C)Dr Interest expense 1 610 Dr Lease liability 21 390
Cr Cash 23 000
D)Dr Lease liability 1 610 Dr Interest expense 21 390
Cr Cash 23 000

Question 12

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 13

AASB 117 deems cancellable leases with which of the following characteristics to be non-cancellable:
I II III IV
-Leases that can be cancelled upon the
Occurrence of some remote contingency No Yes Yes Yes
-Leases that can be cancelled only with
The permission of the lessor Yes No Yes Yes
-Leases where the lessee,upon
Cancellation,is committed to enter into
A further lease with the same lessor Yes Yes Yes No
-Leases that require the lessee to pay a
Substantial penalty on cancellation Yes Yes Yes No

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

Question 14

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 15

Which of the following statements is incorrect?

A)The capitalisation of a leased asset increases the value of reported non-current assets and reduces the return on assets ratio.
B)Recognition of the present value of future lease payments as a liability increases reported current and non-current liabilities.This favourably affects debt-equity ratios and liquidity- solvency ratios.
C)Depreciation and interest expenses on finance leases may exceed rental payments and result in lower profits being reported in the early years of the lease.
D)More onerous disclosure requirements are prescribed for finance leases than for operating leases.

Question 16

According to AASB 117 Leases,because lease payments are made over the lease term,the payments made under a finance lease must be divided into the following components:
I II III IV
-Reduction of the lease liability Yes Yes No Yes
-Interest expense incurred Yes No Yes No
-Reimbursement of lessor costs Yes Yes Yes No
-Receipt of lease incentives No No Yes Yes

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

Question 17

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:
I II III IV
-Outsourcing arrangements Yes Yes No Yes
-Non-cancellable service agreements Yes No Yes No
-Service concession arrangements Yes Yes No Yes
-Take-or-pay contracts No No Yes Yes

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

Question 18

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 19

Explain why 'cancellability' is regarded as an important condition in the classification of a leasing arrangement.

Question 20

On 30 June 2012,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 $1 457 to have drawn up and requires Tango to reimburse Mala for annual insurance costs of $1 050.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 21

Entities normally enter into sale and leaseback arrangements to generate immediate cash flows.Discuss.