Question 1

From the point of view of the lessor,any lease rentals that are a recovery of executory costs should be treated as:

Accepted Answer

A)  a reduction in the lease receivable in the period in which they are received. 
B)  a reduction in interest revenue in the period that the costs are incurred. 
C)  an increase in unearned revenue in the period in which the lease rental is received. 
D)  revenue in the periods in which the related costs are incurred. 
A)  a reduction in the lease receivable in the period in which they are received. 
B)  a reduction in interest revenue in the period that the costs are incurred. 
C)  an increase in unearned revenue in the period in which the lease rental is received. 
D)  revenue in the periods in which the related costs are incurred.

Question 2

Where a lessor is involved in a finance lease (risk has passed to the lessee)the lessor must:

Accepted Answer

A)  remove the asset in question from their statement of financial position as they no longer own it. 
B)  record a new asset on their statement of financial position, a lease receivable, to replace the leased asset. 
C)  only record the revenue earned from lease payments in the statement of comprehensive income as they are received. 
D)  record the sale of the asset to the lessee to ensure the accounting records accurately reflect control of the leased asset. 
A)  remove the asset in question from their statement of financial position as they no longer own it. 
B)  record a new asset on their statement of financial position, a lease receivable, to replace the leased asset. 
C)  only record the revenue earned from lease payments in the statement of comprehensive income as they are received. 
D)  record the sale of the asset to the lessee to ensure the accounting records accurately reflect control of the leased asset.

Question 3

A finance lease is one in which substantially all the risks and benefits of ownership pass to the lessee.

Accepted Answer

A) True 
 B)False

Question 4

Mitchum Ltd entered into a lease agreement on 1 July 2013 to lease equipment on the following terms: $$\begin{array} { | l | r | l | } 
\hline \text { Duration of lease } & 4 \text { years } & \
\hline \text { Useful life of leased asset } & 8 \text { years } & \
\hline \text { Guaranteed residual } & \$ 1,500 & \
\hline \text { Lease payments (in arrears) } & \$ 3,500 & \begin{array} { l } 
\text { per year (4 payments) } \
\text { due } 30 \text { June }
\end{array} \
\hline
\end{array}$$ The interest rate implicit in the lease is 6% and the fair value of the leased asset is $13 316.The lease is cancellable at the option of the lessee.The economic benefits provided by the leased asset are expected to be consumed evenly over its life.What are the appropriate entries in the books of the lessee at the end of the reporting period 30 June 2014?

Accepted Answer

A) 
$$\begin{array} { | r | l | r | r | } 
\hline \mathrm { Dr } & \text { Interest expense } & 799 & \
\hline \mathrm { Dr } & \text { Lease liability } & 2701 & \
\hline \mathrm { Cr } & \text { Cash } & & 3500 \
\hline & & & \
\hline \mathrm { Dr } & \text { Lease amortisation expense } & 1332 & \
\hline \mathrm { Cr } & \text { Accumulated amortisation } & & 1332 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | c | l | r | r | } 
\hline \mathrm { Dr } & \text { Interest expense } & 728 & \
\hline \mathrm { Dr } & \text { Lease liability } & 2772 & \
\hline \mathrm { Cr } & \text { Cash } & & 3500 \
\hline & & & \
\hline \mathrm { Dr } & \text { Lease amortisation expense } & 1213 & \
\hline \mathrm { Cr } & \text { Accumulated amortisation } & & 1213 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Rental expense-equipment } & 3500 & \
\hline \mathrm { Cr } & \text { Cash } & & 3500 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Rental expense-equipment } & 3500 & \
\hline \mathrm { Cr } & \text { Cash } & & 3500 \
\hline & & & \
\hline \mathrm { Dr } & \text { Lease amortisation expense } & 3329 & \
\hline \mathrm { Cr } & \text { Accumulated amortisation } & & 3329 \
\hline
\end{array}$$ 
A) 
$$\begin{array} { | r | l | r | r | } 
\hline \mathrm { Dr } & \text { Interest expense } & 799 & \
\hline \mathrm { Dr } & \text { Lease liability } & 2701 & \
\hline \mathrm { Cr } & \text { Cash } & & 3500 \
\hline & & & \
\hline \mathrm { Dr } & \text { Lease amortisation expense } & 1332 & \
\hline \mathrm { Cr } & \text { Accumulated amortisation } & & 1332 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | c | l | r | r | } 
\hline \mathrm { Dr } & \text { Interest expense } & 728 & \
\hline \mathrm { Dr } & \text { Lease liability } & 2772 & \
\hline \mathrm { Cr } & \text { Cash } & & 3500 \
\hline & & & \
\hline \mathrm { Dr } & \text { Lease amortisation expense } & 1213 & \
\hline \mathrm { Cr } & \text { Accumulated amortisation } & & 1213 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Rental expense-equipment } & 3500 & \
\hline \mathrm { Cr } & \text { Cash } & & 3500 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Rental expense-equipment } & 3500 & \
\hline \mathrm { Cr } & \text { Cash } & & 3500 \
\hline & & & \
\hline \mathrm { Dr } & \text { Lease amortisation expense } & 3329 & \
\hline \mathrm { Cr } & \text { Accumulated amortisation } & & 3329 \
\hline
\end{array}$$

Question 5

For a depreciable asset,the amount of depreciation recognised shall be in accordance with AASB 116.The asset shall be:

Accepted Answer

A)  fully depreciated over the shorter of the lease term and its useful life, if there is a reasonable certainty that the lessee will obtain ownership by the end of the lease term. 
B)  fully depreciated over the shorter of the lease term and its useful life, if there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term 
C)  fully depreciated over the longer of the lease term and its useful life, if there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term. 
D)  fully depreciated over the longer of the lease term and its useful life, if there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term 
A)  fully depreciated over the shorter of the lease term and its useful life, if there is a reasonable certainty that the lessee will obtain ownership by the end of the lease term. 
B)  fully depreciated over the shorter of the lease term and its useful life, if there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term 
C)  fully depreciated over the longer of the lease term and its useful life, if there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term. 
D)  fully depreciated over the longer of the lease term and its useful life, if there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term

Question 6

The following is an extract from a lease payment schedule for Lessee Pty Limited.Assuming Lessee Pty Limited uses the current/non-current dichotomy to disclose liabilities,what are the amounts of (a)current liabilities; and (b)non-current liabilities,relating to this lease,disclosed by Lessee Pty Limited at 30 June 2012? $$\begin{array} { | c | c | c | c | } 
\hline \text { Date } & \begin{array} { c } 
\text { Lease } \
\text { payment }
\end{array} & \begin{array} { c } 
\text { Interest } \
\text { expense }
\end{array} & \begin{array} { c } 
\text { Present value of } \
\text { lease liability }
\end{array} \
\hline 01 \text { July } 2009 & & & 21506 \
\hline \text { 30 June 2010 } & 3500 & 2151 & ? \
\hline
\end{array}$$

Accepted Answer

A)  (a) current 2601; (b) non-current 26 012 
B)  (a) current 1976; (b) non-current 13 268 
C)  (a) current 1796; (b) non-current 15 243 
D)  (a) current 1633; (b) non-current 17 039 
A)  (a) current 2601; (b) non-current 26 012 
B)  (a) current 1976; (b) non-current 13 268 
C)  (a) current 1796; (b) non-current 15 243 
D)  (a) current 1633; (b) non-current 17 039

Question 7

Medusa Ltd enters into a non-cancellable 10-year lease with Lennox Ltd on 1 July 2013.The lease is for an item of equipment that at the inception of the lease has a fair value of $322 572 (the amount that Medusa paid for the asset on 1 July 2013).The equipment is expected to have a useful life of 12 years and the lease term is for 10 years.The lease contract includes a bargain purchase option of $4000 that Lennox Ltd will be able to exercise at the end of the 10-year lease.The lease payments will be made on 30 June each year,beginning 30 June 2014.The payments are to be $55 000 each year with $5000 of this being for executory costs to cover maintenance of the equipment.The maintenance will be carried out annually.The interest rate implicit in the lease is 9%.What are the entries in the books of Medusa Ltd for 1 July 2013 and 30 June 2014 (round amounts to the nearest dollar)?

Accepted Answer

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

Question 8

Lease incentives are:

Accepted Answer

A)  not covered by AASB 117 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 AASB 117 and therefore may lead to divergent practices and designed to entice lessees to enter into non-cancellable operating leases. 
A)  not covered by AASB 117 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 AASB 117 and therefore may lead to divergent practices and designed to entice lessees to enter into non-cancellable operating leases.

Question 9

Snowy River Ltd is a lessee to two lease arrangements.Lease A is non-cancellable,contains a bargain purchase option and the lease term is equal to 75% of the economic life of the asset.Lease B is non-cancellable,lease term is less than 60% of the economic life of the asset and the minimum lease payment represents 75% of the fair value of the leased asset. How should Snowy River Ltd classify Lease A and Lease B respectively?

Accepted Answer

A)  operating lease; operating lease 
B)  operating lease; finance lease 
C)  finance lease; finance lease 
D)  finance lease; operating lease 
A)  operating lease; operating lease 
B)  operating lease; finance lease 
C)  finance lease; finance lease 
D)  finance lease; operating lease

Question 10

Quaid Ltd entered into a lease agreement on 1 July 2012 to lease equipment on the following terms: $$\begin{array} { | l | l | l | } 
\hline \text { Duration of lease } & 3 \text { years } & \
\hline \text { Useful life of leased asset } & 9 \text { years } & \
\hline \text { Lease payments (in arrears) } & \$ 4,000 & \begin{array} { l } 
\text { per year (3 payments) } \
\text { due } 30 \text { June }
\end{array} \
\hline
\end{array}$$ The interest rate implicit in the lease is 8% and the fair value of the leased asset is $24 987.The lease is cancellable if the lessee immediately enters into a further lease for the same or equivalent asset.The economic benefits provided by the lease asset are expected to be consumed evenly over its life.The lease payment has not been made on 30 June before the adjusting entries are made for the year end.What are the appropriate entries in the books of the lessee at the end of the reporting period 30 June 2013?

Accepted Answer

A) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Rental expense–equipment } & 4000 & \
\hline \mathrm { Cr } & \text { Accrued rental } & & 4000 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | c | l | r | r | } 
\hline \mathrm { Dr } & \text { Rental expense-equipment } & 4000 & \
\hline \mathrm { Cr } & \text { Cash } & & 4000 \
\hline & & & \
\hline \mathrm { Dr } & \text { Lease amortisation expense } & 3436 & \
\hline \mathrm { Cr } & \text { Accumulated amortisation } & & 3436 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Interest expense } & 825 & \
\hline \mathrm { Dr } & \text { Lease liability } & 3175 & \
\hline \mathrm { Cr } & \text { Accrued expenses } & & 4000 \
\hline & & & \
\hline \mathrm { Dr } & \text { Lease amortisation expense } & 3436 & \
\hline \mathrm { Cr } & \text { Accumulated amortisation } & & 3436 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | c | l | r | r | } 
\hline \mathrm { Dr } & \text { Interest expense } & 1999 & \
\hline \mathrm { Dr } & \text { Lease liability } & 2001 & \
\hline \mathrm { Cr } & \text { Cash } & & 4000 \
\hline & & & \
\hline \mathrm { Dr } & \text { Lease amortisation expense } & 3436 & \
\hline \mathrm { Cr } & \text { Accumulated amortisation } & & 3436 \
\hline
\end{array}$$ 
A) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Rental expense–equipment } & 4000 & \
\hline \mathrm { Cr } & \text { Accrued rental } & & 4000 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | c | l | r | r | } 
\hline \mathrm { Dr } & \text { Rental expense-equipment } & 4000 & \
\hline \mathrm { Cr } & \text { Cash } & & 4000 \
\hline & & & \
\hline \mathrm { Dr } & \text { Lease amortisation expense } & 3436 & \
\hline \mathrm { Cr } & \text { Accumulated amortisation } & & 3436 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Interest expense } & 825 & \
\hline \mathrm { Dr } & \text { Lease liability } & 3175 & \
\hline \mathrm { Cr } & \text { Accrued expenses } & & 4000 \
\hline & & & \
\hline \mathrm { Dr } & \text { Lease amortisation expense } & 3436 & \
\hline \mathrm { Cr } & \text { Accumulated amortisation } & & 3436 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | c | l | r | r | } 
\hline \mathrm { Dr } & \text { Interest expense } & 1999 & \
\hline \mathrm { Dr } & \text { Lease liability } & 2001 & \
\hline \mathrm { Cr } & \text { Cash } & & 4000 \
\hline & & & \
\hline \mathrm { Dr } & \text { Lease amortisation expense } & 3436 & \
\hline \mathrm { Cr } & \text { Accumulated amortisation } & & 3436 \
\hline
\end{array}$$

Question 11

A guaranteed residual value is that part of the residual value that is guaranteed by the lessee,or by a party related to the lessee.

Accepted Answer

A) True 
 B)False

Question 12

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:
  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 13

Paragraph 47 of AASB 117 requires that for a finance lease,the lessor must disclose:

Accepted Answer

A)  the guaranteed residual values accruing to the lessor. 
B)  unearned finance income. 
C)  contingent rents recognised as expenses in the period. 
D)  the guaranteed residual values accruing to the lessor and unearned finance income. 
A)  the guaranteed residual values accruing to the lessor. 
B)  unearned finance income. 
C)  contingent rents recognised as expenses in the period. 
D)  the guaranteed residual values accruing to the lessor and unearned finance income.

Question 14

In a lease arrangement that is classified by the lessee as an operating lease,the lease payment should be:

Accepted Answer

A)  allocated between depreciation expense and interest expense. 
B)  allocated between the reduction of liability for leased assets and interest expense. 
C)  recognised as a rental expense. 
D)  recognised as an interest expense. 
A)  allocated between depreciation expense and interest expense. 
B)  allocated between the reduction of liability for leased assets and interest expense. 
C)  recognised as a rental expense. 
D)  recognised as an interest expense.

Question 15

If there is reasonable assurance at the inception of the lease that the lessee will obtain ownership of the assets at the end of the lease term,then the leased asset should be depreciated over the lease term.

Accepted Answer

A) True 
 B)False

Question 16

The central accounting issue associated with leases is:

Accepted Answer

A)  the timing of the recognition of the lease payments. 
B)  whether or not the leased assets should be treated as assets of the lessee. 
C)  the treatment of provisions for the repairs and maintenance on leased assets. 
D)  the method of recording any commitment to guarantee the value of the asset at the end of the lease term. 
A)  the timing of the recognition of the lease payments. 
B)  whether or not the leased assets should be treated as assets of the lessee. 
C)  the treatment of provisions for the repairs and maintenance on leased assets. 
D)  the method of recording any commitment to guarantee the value of the asset at the end of the lease term.

Question 17

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.

Question 18

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 19

Under a lease agreement,the lessee may have control of an asset even if the lessee does not have legal ownership.According to the AASB Framework this is not a sufficient basis for recording an asset.

Accepted Answer

A) True 
 B)False

Question 20

In a sale and leaseback transaction,if the risks and rewards incidental to ownership effectively pass to the lessor,this arrangement is classified as a finance lease.

Accepted Answer

A) True 
 B)False

Exam 11: Accounting for Leases

From the point of view of the lessor,any lease rentals that are a recovery of executory costs should be treated as:

Where a lessor is involved in a finance lease (risk has passed to the lessee)the lessor must:

A finance lease is one in which substantially all the risks and benefits of ownership pass to the lessee.

For a depreciable asset,the amount of depreciation recognised shall be in accordance with AASB 116.The asset shall be:

Lease incentives are:

A guaranteed residual value is that part of the residual value that is guaranteed by the lessee,or by a party related to the lessee.

Paragraph 47 of AASB 117 requires that for a finance lease,the lessor must disclose:

In a lease arrangement that is classified by the lessee as an operating lease,the lease payment should be:

If there is reasonable assurance at the inception of the lease that the lessee will obtain ownership of the assets at the end of the lease term,then the leased asset should be depreciated over the lease term.

The central accounting issue associated with leases is:

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

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.

Under a lease agreement,the lessee may have control of an asset even if the lessee does not have legal ownership.According to the AASB Framework this is not a sufficient basis for recording an asset.

In a sale and leaseback transaction,if the risks and rewards incidental to ownership effectively pass to the lessor,this arrangement is classified as a finance 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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