Chat with AIExam 11: Accounting for Leases
Alpine Ltd signed a 10-year non-cancellable lease with Mt Buller Ltd for the use of high-tech equipment.No bargain purchase option is provided in the lease contract.The following information is available: Fair value of equipment \ 200000 Economic life of the equipment 12 years Minimum lease payments \ 120000 Executory costs \ 5,000 What is the amount to be recorded as an asset and a liability in the books of the lessee that is in accordance with AASB 117 Leases?
(75) 
VerifiedC
Discuss how entities with debt-to-asset constraints are affected by the classification of leases as either finance or operating leases.What are the implications for lease accounting?
(91) 
Answered by Examlex AI CopilotEntities with debt-to-asset constraints are significantly affected by the classification of leases as either finance or operating leases. This is because the classification of leases can have a direct impact on the entity's financial ratios and debt covenants.
If a lease is classified as a finance lease, the entity is required to recognize both an asset and a liability on its balance sheet. This can increase the entity's total assets and total liabilities, which in turn can affect its debt-to-asset ratio. If the entity is already close to its debt limit, recognizing a finance lease could push it over the limit and potentially violate its debt covenants.
On the other hand, if a lease is classified as an operating lease, the entity is not required to recognize the lease liability on its balance sheet. This can keep the entity's total liabilities lower, which may help it stay within its debt covenants and maintain a healthy debt-to-asset ratio.
The implications for lease accounting are significant in this context. Entities with debt-to-asset constraints must carefully consider the classification of leases and the potential impact on their financial ratios and debt covenants. They may need to work closely with their lenders and stakeholders to ensure that the classification of leases does not jeopardize their financial health or compliance with debt agreements.
In conclusion, the classification of leases as either finance or operating leases can have a direct impact on entities with debt-to-asset constraints. It is important for these entities to carefully consider the implications for their financial ratios and debt covenants, and to proactively manage their lease accounting to avoid any negative consequences.
In circumstances where the lessee is unable to determine the implicit interest rate in a lease agreement,AASB 117 requires the lessee to use:
(80) VerifiedC
Describe 'lease incentives' and discuss the suggested approach to 'lease incentives' in Interpretation 115.
(85) An owner of an asset may sell it and then lease it back from the new owner.Where this lease meets the conditions to be classified as a finance lease,the profit or loss on the sale of the asset recorded by the lessee should be classified as a finance item in the statement of comprehensive income in the year of the sale.
(83) Lease rentals representing a recovery of material executory costs are to be treated by the lessor as:
(89) What characteristic(s)of land means that the lessee does not normally receive substantially all of the risks and rewards incidental to ownership (in which case making a lease of land an operating lease)?
(86) Cobalt Ltd owns an item of machinery that has a cost of $700 000 and accumulated depreciation of $200 000 as at 1 July 2013.On that date the machine is sold to Blue Ltd for $533 493,and then leased back over 8 years (the remaining life of the machine).The lease is non-cancellable.The lease payments are $100 000 per annum,payable in arrears on 30 June each year.The interest rate implicit in the lease is 10% and the economic benefits of the asset are expected to be realised evenly over its life.What are the entries to record the transactions in Blue's books on 1 July 2013 and 30 June 2014 (rounded to the nearest dollar)?
(77) Explain the accounting treatment for a lease arrangement involving both land and building.
(89) The term 'bargain purchase option' is not used explicitly in AASB 117 but is described as:
(70) For a lessee entering into a finance lease,initial direct costs are:
(79) Explain what is meant by a 'direct finance' lease,and how such leases should be accounted under AASB 117.
(76) A non-cancellable lease is a lease that is cancellable only:
(81) In the case of a finance lease,the accounting treatment by the lessee could:
(70) Paragraph 47 of AASB 117 requires that for a finance lease,the lessor must disclose:
(75) In determining if the risk and rewards of ownership have been transferred,AASB 117 states the following would indicate a finance lease is in effect:
(93) The rental payments made during the term of a finance lease:
(79) 
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