Question 1

The user of a leased asset is referred to as the:
A) vendor;
B) purchaser;
C) lessor;
D) lessee.

Accepted Answer

The lessee is the user of a leased asset, while the lessor is the owner who grants the right to use the asset in exchange for lease payments. The vendor is a seller of goods or services, and the purchaser is a buyer who acquires ownership of an asset through a sale.

Question 2

Which of the following is NOT one of the situations provided in IFRS 16 Leases 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.

Accepted Answer

IFRS 16 does not classify a lease as a finance lease based on the lessee providing a guarantee to acquire the asset at the end of the lease term. Instead, it focuses on criteria like transfer of ownership, lease term, and the present value of lease payments.

Question 3

On 30 June 2016, 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.

Accepted Answer

D

Question 4

IFRS 16 Leases deems cancellable leases with which of the following characteristics to be non-cancellable: $$\begin{array} { | l | l | l | l | l | } 
\hline&I&II&III&IV\
\hline \begin{array} { l } 
\text { Leases that can be cancelled upon the occurrence of } \
\text { some remate contingency }
\end{array} & \text { No } & \text { Yes } & \text { Yes } & \text { Yes } \
\hline \begin{array} { l } 
\text { Leases that can be cancelled only with the permission of } \
\text { the lessor }
\end{array} & \text { Yes } & \text { No } & \text { Yes } & \text { Yes } \
\hline \begin{array} { l } 
\text { Leases where the lessee, upon cancellation, is committed } \
\text { to enter into a further lease with the same lessor }
\end{array} & \text { Yes } & \text { Yes } & \text { Yes } & \text { No } \
\hline \begin{array} { l } 
\text { Leases that require the lessee to pay a substantial penalty } \
\text { on cancellation }
\end{array} & \text { Yes } & \text { Yes } & \text { Yes } & \text { No } \
\hline
\end{array}$$
A) I;
B) II;
C) III;
D) IV.

Accepted Answer

IFRS 16 considers leases non-cancellable if they can only be cancelled with the permission of the lessor, if the lessee is committed to enter into a further lease upon cancellation, or if cancellation requires the lessee to pay a substantial penalty. These conditions make it difficult for the lessee to cancel the lease, effectively making the lease non-cancellable from a practical standpoint.

Question 5

With respect to operating leases, lessors are required under IFRS 16 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.

Accepted Answer

Under IFRS 16, lessors must disclose a general description of the leasing arrangements (III) and the total contingent rents recognised as income in the period (I). Future minimum lease payments under non-cancellable operating leases in aggregate (IV) must also be disclosed. However, there is no requirement to disclose future minimum lease payments under individual, cancellable operating leases separately (II), making option B correct.

Question 6

Nelson Ltd manufactures specialised machinery for both sale and lease. On 1 July 2016, 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.

Accepted Answer

The debit to sales revenue account is the present value of the lease payments, which can be calculated using the interest rate implicit in the lease. The guaranteed residual value is not included in the calculation of the lease payments. Using the formula for present value of an annuity, the present value of lease payments is:

PV = (lease payment) x [1 - (1 / (1 + i)n)] / i

Where i is the interest rate implicit in the lease (10%), n is the number of lease payments (5), and lease payment is the annual rental payment.

Annual rental payment = (fair value - guaranteed residual value) / present value factor

Present value factor = [1 - (1 / (1 + i)n)] / i + (guaranteed residual value / (1 + i)n)

Present value factor = [1 - (1 / (1 + 0.1)5)] / 0.1 + (25,000 / (1 + 0.1)5) = 3.79079

Annual rental payment = (212,515 - 25,000) / 3.79079 = 52,568.32

PV = 52,568.32 x [1 - (1 / (1 + 0.1)5)] / 0.1 = 205,063.05

Therefore, the debit to sales revenue account is €205,063.

Question 7

IFRS 16 Leases 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.

Accepted Answer

Under IFRS 16, manufacturer and dealer lessors are required to recognise selling profit or loss at the commencement of the lease. This approach aligns with the recognition of revenue and costs associated with the sale, reflecting the transfer of control of the underlying asset.

Question 8

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.

Accepted Answer

In relation to finance leases, lessors must disclose unearned finance income, contingent rents recognized as income, and the accumulated allowance for uncollectible minimum lease payments receivable. These disclosures help provide a clear picture of the financial impact and risks associated with finance leases. Unguaranteed residual values accruing to the benefit of the lessee are not typically disclosed separately by lessors.

Question 9

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.

Accepted Answer

Gains on the eventual sale of the asset are not a risk of ownership, but rather a potential benefit. The other options listed are all examples of risks of ownership.

Question 10

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) $\begin{array} { l l r r } 
\mathrm { Dr } & \text { Interest expense } & 4,225 & \
\mathrm { Dr } & \text { Lease liability } & 18,775 & \
\mathrm { Cr } & \text { Cash } & & 23,000
\end{array}$
B) $\begin{array} { l l r r } 
\mathrm { Dr } & \text { Lease liability } & 4,225 & \
\mathrm { Dr } & \text { Interest expense } & 18,775 & \
\mathrm { Cr } & \text { Cash } & & 23,000
\end{array}$
C) $\begin{array} { l l r l } 
\mathrm { Dr } & \text { Interest expense } & 1,610 & \
\mathrm { Dr } & \text { Lease liability } & 21,390 & \
\mathrm { Cr } & \text { Cash } & & 23,000
\end{array}$
D) $\begin{array} { l l r r } 
\mathrm { Dr } & \text { Lease liability } & 1,610 & \
\mathrm { Dr } & \text { Interest expense } & 21,390 & \
\mathrm { Cr } & \text { Cash } & & 23,000
\end{array}$

Accepted Answer

The correct journal entry involves recognizing both the interest expense incurred on the lease liability and the reduction in the lease liability itself. The interest expense is calculated based on the interest rate implicit in the lease (7%) applied to the lease liability at the start of the period. Since the lease payments are made at the end of each year, the first payment includes interest for one year. The remainder of the payment reduces the lease liability. Option A correctly reflects the split between interest expense and reduction in lease liability, aligning with how lease payments are accounted for under finance lease agreements.

Question 11

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.

Accepted Answer

The correct journal entry for the initial recognition of a finance lease by a lessee involves debiting the leased asset and crediting the lease liability. This reflects the lessee's right to use the asset and the obligation to make lease payments.

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.

Accepted Answer

In a finance lease, the lessee (user) assumes substantially all the risks and benefits associated with ownership of the asset, even though legal title may not be transferred until a later time or may never be transferred.

Question 13

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/Trade payables;
D) DR Leased asset CR Cash.

Accepted Answer

The correct journal entry for the initial recognition of a finance lease by a lessor is to debit (DR) Lease receivable, which represents the lessor's right to receive lease payments, and credit (CR) Asset, which removes the leased asset from the lessor's balance sheet, reflecting that the asset is now under the control of the lessee.

Question 14

Under IFRS 16 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.

Accepted Answer

Under IFRS 16 Leases, 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 lessor recognizes the lease income in equal amounts over the lease term, regardless of any lease payments received or due. This is in contrast to finance leases, where the lessor recognizes lease income on a reducing balance basis over the lease term.

Question 15

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 tax authorities;
D) cannot be determined from the information provided.

Accepted Answer

The period over which the asset should be depreciated by the lessee depends on several factors such as the useful life of the asset and the terms of the lease agreement. The information provided in the question is not sufficient to determine the proper depreciation period. Therefore, option D is the best choice.

Question 16

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.

Accepted Answer

A lease incentive received is a benefit or waiver received by the lessee, resulting in a reduction in the total lease payments. Therefore, the lessee accounts for it as a reduction in rental expense over the lease term.

Question 17

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.

Accepted Answer

The answer of The following information relates to questions 
Adam...

Question 18

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.

Accepted Answer

Contingent rentals are not included in the minimum lease payments because they are dependent on the occurrence of a future event or situation, such as usage exceeding a specified amount. The other options (A, C, D) are standard components of minimum lease payments.

Question 19

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

Accepted Answer

The correct accounting treatment for a lease incentive received by a lessee is to recognize the incentive as a liability when it is received. This is because the incentive is considered to be a prepayment for future lease payments, which the lessee will effectively earn over the term of the lease by making lease payments. Therefore, the lessee debits Cash to increase the asset for the cash received and credits a liability account (such as "Lease incentive from lessor") to recognize the obligation to earn the incentive over the lease term.

Question 20

Which of the following is included within the scope of IFRS 16 Leases?
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.

Accepted Answer

Lease agreement for an oil refinery is included within the scope of IFRS 16 Leases. IFRS 16 applies to leases of all types of assets, except for leases of intangible assets such as patents, copyrights, and licenses. Therefore, options A, B, and C are not within the scope of IFRS 16.

Quiz 10: Leases

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

Which of the following is NOT one of the situations provided in IFRS 16 Leases in relation to the classification of leases as finance leases?

IFRS 16 Leases requires manufacturer and dealer lessors to recognise selling profit or loss at the:

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

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

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

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

Under IFRS 16 Leases, lessors are required to account for lease receipts from operating leases as:

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

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

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:

Which of the following is included within the scope of IFRS 16 Leases?