Question 1

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 2

Kingslake Ltd signed a non-cancellable lease contract on 1 January 2012 for a machine that requires 5 annual payments of $200 000 at the start of each year.On the last annual payment,ownership will transfer from the lessor to Kingslake Ltd.The fair value of the asset if paid in cash is $75964.The following information is also available:   What is the implicit rate of this lease arrangement in accordance with AASB 117?

Accepted Answer

A)  10% 
B)  12% 
C)  16% 
D)  Between 10% and 12% 
A)  10% 
B)  12% 
C)  16% 
D)  Between 10% and 12%

Question 3

The following is an extract from a lease payment schedule for Lessee Pty Limited.What is the present value of the lease liability at 30 June 2012? $$\begin{array} { | c | r | c | c | } 
\hline \text { Date } & \begin{array} { c } 
\text { Lease } \
\text { payment }
\end{array} & \begin{array} { c } 
\text { Interest } \
\text { expense }
\end{array} & \begin{array} { c } 
\text { Present value of } \
\text { lease liability }
\end{array} \
\hline 01 \text { July } 2011 & & & 21506 \
\hline \text { 30 June 2012 } & 3500 & 2,151 & ? \
\hline
\end{array}$$

Accepted Answer

A)  18 006 
B)  19 355 
C)  25 006 
D)  20 157 
A)  18 006 
B)  19 355 
C)  25 006 
D)  20 157

Question 4

Fresco Ltd enters into a non-cancellable lease agreement with Meola Ltd to lease some equipment under the following conditions: $$\begin{array} { | l | r | l | } 
\hline \text { Duration } & 20 \text { years } & \
\hline \text { Life of leased asset } & 25 \text { years } & \
\hline \text { Unguaranteed residual } & \$ 9,000 & \
\hline \text { Lease payment } & \$ 2,000 & \text { at inception } \
\hline \text { Lease payments (in arrears) } & \$ 8,500 & \text { per year (20 payments) } \
\hline
\end{array}$$ The interest rate implicit in the lease is 9% and the fair value of the asset at the inception of the lease is $81 199.What are the journal entries to record the lease payment at inception of the lease and the next two lease payments in the books of the lessee (rounded to the nearest dollar)?

Accepted Answer

A) 
  
B) 
  
C) 
  
D) 
  
A) 
  
B) 
  
C) 
  
D)

Question 5

In the situation where there is an unguaranteed residual in a finance lease agreement,the leased asset will be recorded in the books of the lessee at an amount less than its fair value at the inception of the lease.

Accepted Answer

A) True 
 B)False

Question 6

Discuss the presentation and disclosure requirements of operating leases under AASB 117.

Accepted Answer

AASB 117 outlines the presentation and d

Question 7

Johnson Ltd enters into a lease agreement with Peterson Ltd under the following conditions: $$\begin{array} { | l | r | l | } 
\hline \text { Duration of lease } & 10 \text { years } & \
\hline \text { Life of leased asset } & 12 \text { years } & \
\hline \text { Unguaranteed residual } & \$ 8,000 & \
\hline \text { Lease payment } & \$ 6,500 & \text { at lease inception } \
\hline \text { Annual lease payments (in arrears) } & \$ 7,000 & \text { per year (10 payments) } \
\hline
\end{array}$$ The lease may be cancelled only with the permission of the lessor.If the rate of interest implicit in the lease is 10%,what is the fair value of the asset at the inception of the lease,and is the lease a finance or operating lease?

Accepted Answer

A)  $56 745, finance lease 
B)  $52 596, operating lease 
C)  $56 745, operating lease 
D)  $52 596, finance lease 
A)  $56 745, finance lease 
B)  $52 596, operating lease 
C)  $56 745, operating lease 
D)  $52 596, finance lease

Question 8

Gerbert Ltd enters into a finance lease with Hokiman Ltd on 1 July 2012 for an item of machinery that has a fair value at that date of $226 718.The lease is for a period of 4 years,with annual lease payments of $62 000 due on 30 June each year,the first payment to be made in 2013.There is a bargain purchase option of $15 000 available for Hokiman to exercise at the end of the lease period.The rate of interest implicit in the lease is 6%.It cost Gerbert Ltd $190 000 to manufacture the machine.What are the entries in the books of Gerbert Ltd for 1 July 2012 and 30 June 2013 (round amounts to the nearest dollar)?

Accepted Answer

A) 
  
B) 
  
C) 
  
D) 
  
A) 
  
B) 
  
C) 
  
D)

Question 9

A leased asset classified as a finance lease is not subject to depreciation or amortisation.

Accepted Answer

A) True 
 B)False

Question 10

Where a sale and leaseback arrangement involves the benefits and risks of ownership being maintained by the lessee:

Accepted Answer

A)  the lease back is classified as a finance lease. 
B)  the owner has effectively refinanced the asset. 
C)  any profit on the sale should be deferred in the statement of financial position and amortised. 
D)  All of the given answers are correct. 
A)  the lease back is classified as a finance lease. 
B)  the owner has effectively refinanced the asset. 
C)  any profit on the sale should be deferred in the statement of financial position and amortised. 
D)  All of the given answers are correct.

Question 11

From the perspective of the lessor,finance leases can be further classified into:

Accepted Answer

A)  leases involving agricultural products and direct-finance leases. 
B)  leases involving manufacturers or dealers and sales and leasebacks. 
C)  leases involving manufacturers or dealers and direct-finance leases. 
D)  leases involving land and buildings and direct-finance leases 
A)  leases involving agricultural products and direct-finance leases. 
B)  leases involving manufacturers or dealers and sales and leasebacks. 
C)  leases involving manufacturers or dealers and direct-finance leases. 
D)  leases involving land and buildings and direct-finance leases

Question 12

A leased asset under a finance lease should be amortised over the asset's expected useful life if there is a bargain purchase option in the lease agreement.

Accepted Answer

A) True 
 B)False

Question 13

In reference to the statement,'if the non-cancellable lease term is for the major part of the economic life of the asset,the lease is generally considered to be a finance lease',AASB 117 defines 'major part' as 75%.

Accepted Answer

A) True 
 B)False

Question 14

Joplin Ltd entered into a lease agreement on 1 July 2012 with Thomas Ltd.The terms of the lease are as follows: $$\begin{array} { | l | r | l | } 
\hline \text { Duration of lease } & 10 \text { years } & \
\hline \text { Useful life of leased asset } & 13 \text { years } & \
\hline \text { Unguaranteed residual } & \$ 2,000 & \
\hline \text { Lease payment } & \$ 1,000 & \text { at inception } \
\hline \text { Lease payments (in arrears) } & \$ 2,500 & \begin{array} { l } 
\text { per year (10 payments) } \
\text { due } 30 \text { June }
\end{array} \
\hline
\end{array}$$ 
The interest rate implicit in the lease is 6% and the fair value of the leased asset at the inception of the lease is $20517.The lease is non-cancellable and at the end of the lease the asset is returned to the lessor.The economic benefits provided by the lease asset are expected to be consumed evenly over its life.What is the value of the lease asset and lease liability in the books of the lessee after adjusting entries made on 30 June 2013?

Accepted Answer

A)  lease asset: $17908; lease liability: $18064 
B)  lease asset: $21352; lease liability: $21954 
C)  lease asset: $18465; lease liability: $18188 
D)  lease asset: $17460; lease liability: $17004 
A)  lease asset: $17908; lease liability: $18064 
B)  lease asset: $21352; lease liability: $21954 
C)  lease asset: $18465; lease liability: $18188 
D)  lease asset: $17460; lease liability: $17004

Question 15

Describe how a lessee would account for the depreciation (amortisation)of a leased asset.

Accepted Answer

When a lessee leases an asset, they must

Question 16

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 Cobalt's books on 1 July 2013 and 30 June 2014 (rounded to the nearest dollar)?

Accepted Answer

A) 
  
B) 
  
C) 
  
D) 
  
A) 
  
B) 
  
C) 
  
D)

Question 17

The following journal entry,in the books of Lessee Pty Limited,records the entry for the depreciation expense at 30 June 2012.The lease term is of 5 years duration.Which of the following statements is correct?
30 June 2012 $$\begin{array} { | l | l | l | l | } 
\hline \text { Dr } & \text { Lease depreciation expense } & 103274 & \
\hline \mathrm { Cr } & \text { Accumulated depreciation-leased asset } & & 103274 \
\hline
\end{array}$$ (to record depreciation expense [(739,648 - 120,000)/6]

Accepted Answer

A)  The economic life of the asset is 6 years. 
B)  It is reasonably certain that the lessee will obtain ownership of the asset at the end of the lease term. 
C)  It is reasonably certain that the lessee will not obtain ownership of the asset at the end of the lease term. 
D)  The economic life of the asset is 6 years; and it is reasonably certain that the lessee will obtain ownership of the asset at the end of the lease term. 
A)  The economic life of the asset is 6 years. 
B)  It is reasonably certain that the lessee will obtain ownership of the asset at the end of the lease term. 
C)  It is reasonably certain that the lessee will not obtain ownership of the asset at the end of the lease term. 
D)  The economic life of the asset is 6 years; and it is reasonably certain that the lessee will obtain ownership of the asset at the end of the lease term.

Question 18

A sale and leaseback arrangement may involve an operating lease where the benefits and risks of ownership have effectively passed to the lessor.In this situation if the sale is not made at the fair value of the asset,the appropriate treatment is to:

Accepted Answer

A)  Write-down the asset to its fair value where the carrying value is greater than the fair value. Where the sale price is above fair value the excess of sales price over fair value must be deferred and amortised by the lessee in proportion to the rental payments over the lease term. 
B)  Revalue the asset to fair value and in the case that the sale price is less than the fair value write-off the loss to the statement of comprehensive income in the period of the sale. In the case that the sale price is greater than the fair value, the profit should be deferred and amortised against the future rental payments. 
C)  Write-down the asset to its fair value where the carrying value is greater than the fair value. Where the sale price is below fair value any profit or loss must be recognised immediately by the lessee except that, to the extent the loss is compensated by future rentals at below market price, it must be deferred and amortised in proportion to the rental payments over the lease term. 
D)  Write-down the asset to its fair value where the carrying value is greater than the fair value. Where the sale price is above fair value the excess of sales price over fair value must be deferred and amortised by the lessee in proportion to the rental payments over the lease term and write-down the asset to its fair value where the carrying value is greater than the fair value. Where the sale price is below fair value any profit or loss must be recognised immediately by the lessee except that, to the extent the loss is compensated by future rentals at below market price, it must be deferred and amortised in proportion to the rental payments over the lease term. 
A)  Write-down the asset to its fair value where the carrying value is greater than the fair value. Where the sale price is above fair value the excess of sales price over fair value must be deferred and amortised by the lessee in proportion to the rental payments over the lease term. 
B)  Revalue the asset to fair value and in the case that the sale price is less than the fair value write-off the loss to the statement of comprehensive income in the period of the sale. In the case that the sale price is greater than the fair value, the profit should be deferred and amortised against the future rental payments. 
C)  Write-down the asset to its fair value where the carrying value is greater than the fair value. Where the sale price is below fair value any profit or loss must be recognised immediately by the lessee except that, to the extent the loss is compensated by future rentals at below market price, it must be deferred and amortised in proportion to the rental payments over the lease term. 
D)  Write-down the asset to its fair value where the carrying value is greater than the fair value. Where the sale price is above fair value the excess of sales price over fair value must be deferred and amortised by the lessee in proportion to the rental payments over the lease term and write-down the asset to its fair value where the carrying value is greater than the fair value. Where the sale price is below fair value any profit or loss must be recognised immediately by the lessee except that, to the extent the loss is compensated by future rentals at below market price, it must be deferred and amortised in proportion to the rental payments over the lease term.

Question 19

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 20

Discuss the issues raised by the IASB and the US FASB on the accounting treatment for operating leases and how this arrangement gives rise to an asset and a liability to the lessee at inception of the lease.

Accepted Answer

The International Accounting Standards B

Exam 11: Accounting for Leases

Where there is a lease involving a manufacturer or dealer:

The following is an extract from a lease payment schedule for Lessee Pty Limited.What is the present value of the lease liability at 30 June 2012? Date Lease payment Interest expense Present value of lease liability 01 July 2011 21506 30 June 2012 3500 2,151 ?

In the situation where there is an unguaranteed residual in a finance lease agreement,the leased asset will be recorded in the books of the lessee at an amount less than its fair value at the inception of the lease.

Discuss the presentation and disclosure requirements of operating leases under AASB 117.

A leased asset classified as a finance lease is not subject to depreciation or amortisation.

Where a sale and leaseback arrangement involves the benefits and risks of ownership being maintained by the lessee:

From the perspective of the lessor,finance leases can be further classified into:

A leased asset under a finance lease should be amortised over the asset's expected useful life if there is a bargain purchase option in the lease agreement.

In reference to the statement,'if the non-cancellable lease term is for the major part of the economic life of the asset,the lease is generally considered to be a finance lease',AASB 117 defines 'major part' as 75%.

Describe how a lessee would account for the depreciation (amortisation)of a leased asset.

A sale and leaseback arrangement may involve an operating lease where the benefits and risks of ownership have effectively passed to the lessor.In this situation if the sale is not made at the fair value of the asset,the appropriate treatment is to:

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.

Discuss the issues raised by the IASB and the US FASB on the accounting treatment for operating leases and how this arrangement gives rise to an asset and a liability to the lessee at inception of the lease.

An Overview of the Australian External Reporting Environment

The Conceptual Framework of Accounting and Its Relevance to Financial Reporting

Theories of 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

Accounting for Heritage Assets and Biological Assets

An Overview of Accounting for Liabilities

Accounting for Employee Benefits

Share Capital and Reserves

Accounting for Financial Instruments

Revenue Recognition Issues

The Statement of Comprehensive Income and Statement of Changes in Equity

Accounting for Share-Based Payments

Accounting for Income Taxes

The Statement of Cash Flows

Accounting for the Extractive Industries

Accounting for General Insurance Contracts

Accounting for Superannuation Plans

Events Occurring After the End of the Reporting Period

Segment Reporting

Related Party Disclosures

Earnings Per Share

Accounting for Group Structures

Further Consolidation Issues I: Accounting for Intragroup Transactions

Further Consolidation Issues II: Accounting for Non-Controlling Interests

Further Consolidation Issues IV: Accounting for Changes in the Degree of Ownership of a Subsidiary

Accounting for Equity Investments,including Investments in Associates and Joint Arrangements

Accounting for Foreign Currency Transactions

Translating the Financial Statements of Foreign Operations

Accounting for Corporate Social Responsibility

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