Question 1

The rental payments made during the term of a finance lease:

Accepted Answer

A) are reductions of the lease liability that should be debited to the liability account. 
B) are an expense that should be recognised in the annual statements of comprehensive income. 
C) need to be divided into an interest component and an expense component.The expense effectively shows the amortisation of the lease asset. 
D) should be considered as a payment of principal (reduction in the lease liability) and interest (an annual expense). 
A) are reductions of the lease liability that should be debited to the liability account. 
B) are an expense that should be recognised in the annual statements of comprehensive income. 
C) need to be divided into an interest component and an expense component.The expense effectively shows the amortisation of the lease asset. 
D) should be considered as a payment of principal (reduction in the lease liability) and interest (an annual expense).

Question 2

Lease incentives are:

Accepted Answer

A) not covered by IAS 17 and therefore may lead to divergent practices. 
B) revenues for the lessees and may be recorded in the initial period of the lease contract. 
C) designed to entice lessees to enter into non-cancellable operating leases. 
D) not covered by IAS 17 and therefore may lead to divergent practices and designed to entice lessees to enter into non-cancellable operating leases. 
A) not covered by IAS 17 and therefore may lead to divergent practices. 
B) revenues for the lessees and may be recorded in the initial period of the lease contract. 
C) designed to entice lessees to enter into non-cancellable operating leases. 
D) not covered by IAS 17 and therefore may lead to divergent practices and designed to entice lessees to enter into non-cancellable operating leases.

Question 3

Kensington Ltd decides to lease some equipment from Piccadilly Ltd on the following terms: $$\begin{array} { | l | r | l | } 
\hline \text { Duration of lease } & 15 \text { years } & \
\hline \text { Life of leased asset } & 17 \text { years } & \
\hline \text { Unguaranteed residual } & \$ 5,000 & \
\hline \text { Lease payment } & \$ 6,000 & \text { at lease inception } \
\hline \text { Annual lease payments (in arrears) } & \$ 4,500 & \text { per year (15 payments) } \
\hline
\end{array}$$ If the interest rate implicit in the lease is 8%,what is the fair value of the equipment at the inception of the lease (rounded to the nearest dollar)?

Accepted Answer

A) $44 518 
B) $46 094 
C) $40 094 
D) $48 399 
A) $44 518 
B) $46 094 
C) $40 094 
D) $48 399

Question 4

Contingent rent is included in the determination of minimum lease payments under IAS 17 Leases.

Accepted Answer

A) True 
 B)False

Question 5

The following journal entry,in the books of Lessee Pty Plc,records the lease payment made at 30 June 2014.The actual lease payment,the present value of which was included in the calculation of minimum lease payments at the inception of the lease,is:
30 June 2014 $$\begin{array} { | l | l | r | l | } 
\hline \mathrm { Dr } & \text { Executory expense } & 10000 & \
\hline \mathrm { Dr } & \text { Interest expense } & 13000 & \
\hline \mathrm { Dr } & \text { Lease liability } & 87000 & \
\hline \mathrm { Cr } & \text { Cash } & & 110000 \
\hline
\end{array}$$

Accepted Answer

A) €87000 
B) €93000 
C) €97000 
D) €100000 
A) €87000 
B) €93000 
C) €97000 
D) €100000

Question 6

Describe 'lease incentives' and discuss suggested approaches to accounting for 'lease incentives'.

Accepted Answer

It is quite common for potential lessees

Question 7

Minimum lease payments include:

Accepted Answer

A) any bargain purchase option amount. 
B) any rentals paid to reimburse the lessor for executory costs. 
C) contingent rentals. 
D) unguaranteed residuals. 
A) any bargain purchase option amount. 
B) any rentals paid to reimburse the lessor for executory costs. 
C) contingent rentals. 
D) unguaranteed residuals.

Question 8

Operating leases are capitalised for inclusion in the statement of financial position.

Accepted Answer

A) True 
 B)False

Question 9

A non-cancellable lease,which transfers the risks and rewards associated with asset ownership,can still be terminated early with the permission of the lessor.

Accepted Answer

A) True 
 B)False

Question 10

A lease involving land and buildings:

Accepted Answer

A) must be recorded as an operating lease as land has an indefinite life. 
B) requires two separate leases to be recorded, one for the land and another for the building. 
C) will still require a determination to be made as to whether the lease constitutes a finance or operating lease. 
D) requires the minimum lease repayments to be split evenly between the land and buildings. 
A) must be recorded as an operating lease as land has an indefinite life. 
B) requires two separate leases to be recorded, one for the land and another for the building. 
C) will still require a determination to be made as to whether the lease constitutes a finance or operating lease. 
D) requires the minimum lease repayments to be split evenly between the land and buildings.

Question 11

Where there is a lease involving a manufacturer or dealer:

Accepted Answer

A) There are really two parts to the transaction. 
B) There will be a difference between the cost of the asset to the lessor and its fair value at the inception of the lease. 
C) The lessor's investment would be accounted for in the same way as a direct-financing lease. 
D) There are really two parts to the transaction and there will be a difference between the cost of the asset to the lessor and its fair value at the inception of the lease. 
A) There are really two parts to the transaction. 
B) There will be a difference between the cost of the asset to the lessor and its fair value at the inception of the lease. 
C) The lessor's investment would be accounted for in the same way as a direct-financing lease. 
D) There are really two parts to the transaction and there will be a difference between the cost of the asset to the lessor and its fair value at the inception of the lease.

Question 12

The amount of a lease receivable recorded by the lessor for a direct finance lease should equal at the beginning of the lease term:

Accepted Answer

A) the aggregate of the present value of the minimum lease and executory payments and the present value of any unguaranteed residual value expected to accrue to the benefit of the lessor at the end of the lease term. 
B) the aggregate of the present value of the minimum lease payments and the present value of any unguaranteed residual value expected to accrue to the benefit of the lessor at the end of the lease term.Any initial direct costs should also be included in the lease receivable. 
C) the aggregate of the present value of the total lease payments and the present value of any guaranteed residual value expected to accrue to the benefit of the lessor at the end of the lease term. 
D) the aggregate of the present value of the minimum lease payments and the present value of any guaranteed residual value expected to accrue to the benefit of the lessor at the end of the lease term, plus any initial direct costs. 
A) the aggregate of the present value of the minimum lease and executory payments and the present value of any unguaranteed residual value expected to accrue to the benefit of the lessor at the end of the lease term. 
B) the aggregate of the present value of the minimum lease payments and the present value of any unguaranteed residual value expected to accrue to the benefit of the lessor at the end of the lease term.Any initial direct costs should also be included in the lease receivable. 
C) the aggregate of the present value of the total lease payments and the present value of any guaranteed residual value expected to accrue to the benefit of the lessor at the end of the lease term. 
D) the aggregate of the present value of the minimum lease payments and the present value of any guaranteed residual value expected to accrue to the benefit of the lessor at the end of the lease term, plus any initial direct costs.

Question 13

Over the term of the lease,the rental payments to the lessor represent a payment of principal plus interest.

Accepted Answer

A) True 
 B)False

Question 14

If the lease arrangement contains a bargain purchase option,it is reasonable to assume that the risks and rewards of ownership are transferred to the lessee.

Accepted Answer

A) True 
 B)False

Question 15

The initial direct costs of a sales-type lease,borne by the lessor,are to be accounted for by the lessor as part of the lease receivable.

Accepted Answer

A) True 
 B)False

Question 16

Under IAS 17,operating leases require the following disclosures by lessees:

Accepted Answer

A) the total of future minimum sublease payments expected to be received under non-cancellable subleases at the statement of financial position date. 
B) a general description of the lessee's significant leasing arrangements. 
C) No disclosures are required as operating leases are expensed each year. 
D) the total of future minimum sublease payments expected to be received under non-cancellable subleases at the statement of financial position date and a general description of the lessee's significant leasing arrangements. 
A) the total of future minimum sublease payments expected to be received under non-cancellable subleases at the statement of financial position date. 
B) a general description of the lessee's significant leasing arrangements. 
C) No disclosures are required as operating leases are expensed each year. 
D) the total of future minimum sublease payments expected to be received under non-cancellable subleases at the statement of financial position date and a general description of the lessee's significant leasing arrangements.

Question 17

Schwann Plc enters into a non-cancellable 5-year lease for office space in Bigtown's central business district.The building has an expected remaining life of 40 years.Schwann Plc has been offered a free fit-out of the office as an incentive to take up the lease.The fit-out would have cost Schwann Ltd €90 000 to do itself.The benefits of the fit-out are to be recognised on a straight-line basis.The rental payments are €110 000 per annum.How would the signing of the lease and the first rental payment be recorded by Schwann Plc?

Accepted Answer

A)  $\begin{array}{|c|l|r|l|}
\hline\text { On signing the lease: }\
\hline\
\hline \mathrm{Dr} & \text { Fixtures and fittings } & 90000 & \
\hline \mathrm{Dr} & \text { Deferred lease payments } & 460000 & \
\hline \mathrm{Cr} & \text { Lease payable } & & 550000 \
\hline\
\hline\text { First rental payment: }\\hline \mathrm{Dr} & \text { Lease payable } & 18000 & \
\hline \mathrm{Dr} & \text { Lease rental expense } & 92000 & \
\hline \mathrm{Cr} & \text { Deferred lease payments } & & 110000 \
\hline
\end{array}$ 
B)  $\text { On signing the lease: }$
$\begin{array}{|l|l|l|l|}
\hline \mathrm{Dr} & \text { Fixtures and fittings } & 90000 & \
\hline \mathrm{Cr} & \text { Lease incentive liability } & & 90000 \
\hline
\end{array}$

$\text { First rental payment: }$ 
$\begin{array}{|l|l|l|l|}
\hline \mathrm{Dr} & \text { Lease rental expense } & 110000 & \
\hline \mathrm{Cr} & \text { Cash } & & 110000\
\hline
\end{array}$ 
C)  $$\begin{array}{l}
\begin{array} { | c | l | c | c | } 
\hline\text { On signing the lease: }\
\hline \text { Dr } & \text { Fixtures and fittings } & 90000 & \
\hline \mathrm { Cr } & \text { Lease incentive liability } & & 90000 \\hline\
\hline { \text { First rental payment: } } & & \
\hline \mathrm { Dr } & \text { Lease incentive liability } & 18000  & \
\hline \mathrm { Dr } & \text { Lease rental expense } & 92000 & \
\hline \mathrm { Cr } & \text { Cash } && 110000\
\hline
\end{array}
\end{array}$$ 
D)  $$\begin{array}{l}\begin{array} { | c | l | c | c | } 
\hline
\text { On signing the lease: }\
\hline \text { Dr } & \text { Building } & 640000 & \
\hline \mathrm { Cr } & \text { Lease liability } & & 640000 \\hline\
\hline  { \text { First rental payment: } } & & \
\hline \mathrm { Dr } & \text { Interest expense } & 18000 & \
\hline \mathrm { Dr } & \text { Lease liability } & 92000 & \
\hline \mathrm { Cr } & \text { Cash } & &110000 \
\hline
\end{array}
\end{array}$$ 
A)  $\begin{array}{|c|l|r|l|}
\hline\text { On signing the lease: }\
\hline\
\hline \mathrm{Dr} & \text { Fixtures and fittings } & 90000 & \
\hline \mathrm{Dr} & \text { Deferred lease payments } & 460000 & \
\hline \mathrm{Cr} & \text { Lease payable } & & 550000 \
\hline\
\hline\text { First rental payment: }\\hline \mathrm{Dr} & \text { Lease payable } & 18000 & \
\hline \mathrm{Dr} & \text { Lease rental expense } & 92000 & \
\hline \mathrm{Cr} & \text { Deferred lease payments } & & 110000 \
\hline
\end{array}$ 
B)  $\text { On signing the lease: }$
$\begin{array}{|l|l|l|l|}
\hline \mathrm{Dr} & \text { Fixtures and fittings } & 90000 & \
\hline \mathrm{Cr} & \text { Lease incentive liability } & & 90000 \
\hline
\end{array}$

$\text { First rental payment: }$ 
$\begin{array}{|l|l|l|l|}
\hline \mathrm{Dr} & \text { Lease rental expense } & 110000 & \
\hline \mathrm{Cr} & \text { Cash } & & 110000\
\hline
\end{array}$ 
C)  $$\begin{array}{l}
\begin{array} { | c | l | c | c | } 
\hline\text { On signing the lease: }\
\hline \text { Dr } & \text { Fixtures and fittings } & 90000 & \
\hline \mathrm { Cr } & \text { Lease incentive liability } & & 90000 \\hline\
\hline { \text { First rental payment: } } & & \
\hline \mathrm { Dr } & \text { Lease incentive liability } & 18000  & \
\hline \mathrm { Dr } & \text { Lease rental expense } & 92000 & \
\hline \mathrm { Cr } & \text { Cash } && 110000\
\hline
\end{array}
\end{array}$$ 
D)  $$\begin{array}{l}\begin{array} { | c | l | c | c | } 
\hline
\text { On signing the lease: }\
\hline \text { Dr } & \text { Building } & 640000 & \
\hline \mathrm { Cr } & \text { Lease liability } & & 640000 \\hline\
\hline  { \text { First rental payment: } } & & \
\hline \mathrm { Dr } & \text { Interest expense } & 18000 & \
\hline \mathrm { Dr } & \text { Lease liability } & 92000 & \
\hline \mathrm { Cr } & \text { Cash } & &110000 \
\hline
\end{array}
\end{array}$$

Question 18

On 1 January 2012 Dobel Ltd signed a 10-year non-cancellable lease that requires a payment of $100 000 at the end of each year.Ownership of the leased asset remains with the lessor at expiry of the lease.The incremental borrowing rate of Dobel Ltd is 12% while the implicit rate of the lessor known to Dobel Ltd is 10%. The following information is also available: $\begin{array}{|r|r|r|}
\hline \text { Period } & \text { Present value of an annuity of } \$ 1 \
\hline & 10 \% & 12 \
\hline 10 & 6.1446 & 5.6502 \
\hline
\end{array}$ At what amount should the leased property be recorded in the books of Dobel Ltd?

Accepted Answer

A) $0 
B) $565 020 
C) $614 460 
D) $1 000 000 
A) $0 
B) $565 020 
C) $614 460 
D) $1 000 000

Question 19

The depreciation policy for depreciable leased assets shall be consistent with:

Accepted Answer

A) the lessor's normal depreciation policy for similar assets. 
B) the lessee's normal depreciation policy for similar assets. 
C) the lessor's implicit rate of interest. 
D) the lessee's implicit rate of interest 
A) the lessor's normal depreciation policy for similar assets. 
B) the lessee's normal depreciation policy for similar assets. 
C) the lessor's implicit rate of interest. 
D) the lessee's implicit rate of interest

Question 20

If the gross method is adopted,the lease receivable is recorded as the sum of:

Accepted Answer

A) the undiscounted minimum lease payments and the guaranteed residual. 
B) the undiscounted minimum lease payments and the unguaranteed residual. 
C) the discounted minimum lease payments and the unguaranteed residual. 
D) the discounted minimum lease payments and the guaranteed residual. 
A) the undiscounted minimum lease payments and the guaranteed residual. 
B) the undiscounted minimum lease payments and the unguaranteed residual. 
C) the discounted minimum lease payments and the unguaranteed residual. 
D) the discounted minimum lease payments and the guaranteed residual.

Exam 10: Accounting for Leases

The rental payments made during the term of a finance lease:

Lease incentives are:

Contingent rent is included in the determination of minimum lease payments under IAS 17 Leases.

Describe 'lease incentives' and discuss suggested approaches to accounting for 'lease incentives'.

Minimum lease payments include:

Operating leases are capitalised for inclusion in the statement of financial position.

A non-cancellable lease,which transfers the risks and rewards associated with asset ownership,can still be terminated early with the permission of the lessor.

A lease involving land and buildings:

Where there is a lease involving a manufacturer or dealer:

The amount of a lease receivable recorded by the lessor for a direct finance lease should equal at the beginning of the lease term:

Over the term of the lease,the rental payments to the lessor represent a payment of principal plus interest.

If the lease arrangement contains a bargain purchase option,it is reasonable to assume that the risks and rewards of ownership are transferred to the lessee.

The initial direct costs of a sales-type lease,borne by the lessor,are to be accounted for by the lessor as part of the lease receivable.

Under IAS 17,operating leases require the following disclosures by lessees:

The depreciation policy for depreciable leased assets shall be consistent with:

If the gross method is adopted,the lease receivable is recorded as the sum of:

An Overview of the International External Reporting Environment

The Conceptual Framework of Accounting and Its Relevance to Financial Reporting

Theories of Financial Accounting

An Overview of Accounting for Assets

Depreciation of Property, Plant and Equipment

Revaluations and Impairment Testing of Non-Current Assets

Inventory

Accounting for Intangibles

An Overview of Accounting for Liabilities

Share Capital, Reserves and Share Options Employee Bonus Schemes

Accounting for Financial Instruments

Revenue Recognition Issues

The Statement of Comprehensive Income and Statement of Changes in Equity

Accounting for Income Taxes

The Statement of Cash Flows

Events Occurring After the Reporting Date

Related-Party Disclosures

Earnings Per Share

Further Consolidation Issues I: Accounting for Intragroup Transactions

Further Consolidation Issues II: Accounting for Non-Controlling Interests

Further Consolidation Issues III: Accounting for Indirect Ownership Interest

Accounting for Foreign Currency Transactions

Translating the Financial Statements of Foreign Operations

Accounting for Corporate Social Responsibility

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