Question 1

Which of the following is NOT a reason given by the IASB to remove the requirement to classify leases from any future accounting standard?

Accepted Answer

A)  All leases give rise to a right to use the leased item that meets the definition of an asset; a single conceptual model to account for all leases is preferable. 
B)  The removal of classification would result in a simpler accounting standard. 
C)  Removing the classification may result in inconsistencies in how the minimum lease payments are determined for classification purposes. 
D)  Removal of classification would result in similar transactions being accounted for in the same way. 
A)  All leases give rise to a right to use the leased item that meets the definition of an asset; a single conceptual model to account for all leases is preferable. 
B)  The removal of classification would result in a simpler accounting standard. 
C)  Removing the classification may result in inconsistencies in how the minimum lease payments are determined for classification purposes. 
D)  Removal of classification would result in similar transactions being accounted for in the same way. C

Question 2

With respect to operating leases, lessors are required under AASB 117 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.

Accepted Answer

A)  I, II and III only 
B)  I, III and IV only 
C)  II and III only 
D)  I, II and IV only. 
A)  I, II and III only 
B)  I, III and IV only 
C)  II and III only 
D)  I, II and IV only. B

Question 3

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:

Accepted Answer

A)  $\begin{array} { l l r r } 
\mathrm { Dr } & \text { Interest expense } & 4225 & \
\mathrm { Dr } & \text { Lease liability } & 18775 & \
\mathrm { Cr } & \text { Cash } & & 23000
\end{array}$ 
B) $\begin{array} { l l r r } 
\text { Dr } & \text { Lease liability } & 4225 & \
\mathrm { Dr } & \text { Interest expense } & 18775 & \
\mathrm { Cr } & \text { Cash } & & 23000
\end{array}$ 
C)  $\begin{array} { l l r r } 
\text { Dr } & \text { Interest expense } & 1610 & \
\mathrm { Dr } & \text { Lease liability } & 21390 & \
\mathrm { Cr } & \text { Cash } & & 23000
\end{array}$ 
D) $\begin{array}{llr}
\mathrm{Dr} & \text { Lease liability } & 1,610 \
\mathrm{Dr} & \text { Interest expense } & 21,390\
\mathrm{Cr} &\text { Cash }&23,000
\end{array}$ 
A)  $\begin{array} { l l r r } 
\mathrm { Dr } & \text { Interest expense } & 4225 & \
\mathrm { Dr } & \text { Lease liability } & 18775 & \
\mathrm { Cr } & \text { Cash } & & 23000
\end{array}$ 
B) $\begin{array} { l l r r } 
\text { Dr } & \text { Lease liability } & 4225 & \
\mathrm { Dr } & \text { Interest expense } & 18775 & \
\mathrm { Cr } & \text { Cash } & & 23000
\end{array}$ 
C)  $\begin{array} { l l r r } 
\text { Dr } & \text { Interest expense } & 1610 & \
\mathrm { Dr } & \text { Lease liability } & 21390 & \
\mathrm { Cr } & \text { Cash } & & 23000
\end{array}$ 
D) $\begin{array}{llr}
\mathrm{Dr} & \text { Lease liability } & 1,610 \
\mathrm{Dr} & \text { Interest expense } & 21,390\
\mathrm{Cr} &\text { Cash }&23,000
\end{array}$ A

Question 4

If a sale and leaseback transaction results in a finance lease, AASB 117 Leases, provides the following accounting treatment for any excess of sales proceeds over the carrying amount:

Accepted Answer

A)  recognise directly in retained earnings of the seller-lessee 
B)  immediately recognise as income by the seller-lessee 
C)  defer and amortise over the lease term 
D)  include in the capitalised amount of the leased asset. 
A)  recognise directly in retained earnings of the seller-lessee 
B)  immediately recognise as income by the seller-lessee 
C)  defer and amortise over the lease term 
D)  include in the capitalised amount of the leased asset.

Question 5

Which of the following is NOT one of the situations provided in AASB 117 in relation to the classification of leases as finance leases?

Accepted Answer

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. 
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.

Question 6

AASB 117 requires manufacturer and dealer lessors to recognise selling profit or loss at the:

Accepted Answer

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 
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

Question 7

Which of the following is included within the scope of AASB 117?

Accepted Answer

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 
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

Question 8

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

Accepted Answer

A)  idle capacity 
B)  gains on the eventual sale of the asset 
C)  uninsured damage 
D)  technical obsolescence 
A)  idle capacity 
B)  gains on the eventual sale of the asset 
C)  uninsured damage 
D)  technical obsolescence

Question 9

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

Accepted Answer

A)  DR Leased asset: CR Lease liability 
B)  DR Lease rental expense: CR Cash/Accounts payable 
C)  DR Leased asset: CR Cash/Accounts payable 
D)  DR Lease asset: CR Lease interest expense 
A)  DR Leased asset: CR Lease liability 
B)  DR Lease rental expense: CR Cash/Accounts payable 
C)  DR Leased asset: CR Cash/Accounts payable 
D)  DR Lease asset: CR Lease interest expense

Question 10

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.

Accepted Answer

A)  I, II and IV only 
B)  I, III and IV only 
C)  II, III and IV only 
D)  II and IV only. 
A)  I, II and IV only 
B)  I, III and IV only 
C)  II, III and IV only 
D)  II and IV only.

Question 11

The main concerns about the current accounting standard relating to leases include:
I the dividing line between finance and operating leases is hard to define in a principled way
II obligations under cancellable operating leases are little different from borrowings, but are not recognised as liabilities
III assets used in the business that are held under operating leases are not shown on the statement of financial position, thereby understating return on assets
IV leases are scoped out of the financial instruments standards, leading to inconsistencies between leases and similar transactions

Accepted Answer

A)  I and II 
B)  II and III 
C)  III and IV 
D)  I and IV 
A)  I and II 
B)  II and III 
C)  III and IV 
D)  I and IV

Question 12

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

Accepted Answer

A)  bargain purchase option 
B)  contingent rentals 
C)  a guaranteed residual value 
D)  the lease payments occurring over the lease term 
A)  bargain purchase option 
B)  contingent rentals 
C)  a guaranteed residual value 
D)  the lease payments occurring over the lease term

Question 13

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:

Accepted Answer

A)  $60 359 
B)  $64 170 
C)  $64 584 
D)  $69 000 
A)  $60 359 
B)  $64 170 
C)  $64 584 
D)  $69 000

Question 14

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

Accepted Answer

A)  DR Lease receivable: CR Asset 
B)  DR Lease receivable: CR Lease liability 
C)  DR Leased asset: CR Cash/Accounts payable 
D)  DR Leased asset: CR Cash 
A)  DR Lease receivable: CR Asset 
B)  DR Lease receivable: CR Lease liability 
C)  DR Leased asset: CR Cash/Accounts payable 
D)  DR Leased asset: CR Cash

Question 15

Under AASB 117 Leases, lessors are required to account for lease receipts from operating leases as:

Accepted Answer

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. 
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.

Question 16

Timely Limited accepts a lease incentive to enter into a 4-year operating lease for equipment. The incentive is cash amounting to $10 000 that will be paid on the date the lease agreement is signed. On inception of the lease, the lessor will record:

Accepted Answer

A)  $\begin{array} { l l l } 
\mathrm { DR } & \mathrm { Cash } & \$ 10000 \
\mathrm { CR } & \text { Incentive to lessee } &\$ 10000 
\end{array}$ 
B)  $\text { DR\quad Incentive to lessee } \quad \$ 10000$
$\begin{array}{lll}
C R & \text { Cash } & \$ 10000
\end{array}$ 
C)  $\text { DR\quad Rent income } \quad \$ 10,000$
$\text { CR } \quad \text { Rent expense } \quad \$ 10,000$ 
D)  $\text { DR\quad Cash } \quad \$ 10000$
$\text { CR } \quad \text { Rent income } \quad \$ 10000$ 
A)  $\begin{array} { l l l } 
\mathrm { DR } & \mathrm { Cash } & \$ 10000 \
\mathrm { CR } & \text { Incentive to lessee } &\$ 10000 
\end{array}$ 
B)  $\text { DR\quad Incentive to lessee } \quad \$ 10000$
$\begin{array}{lll}
C R & \text { Cash } & \$ 10000
\end{array}$ 
C)  $\text { DR\quad Rent income } \quad \$ 10,000$
$\text { CR } \quad \text { Rent expense } \quad \$ 10,000$ 
D)  $\text { DR\quad Cash } \quad \$ 10000$
$\text { CR } \quad \text { Rent income } \quad \$ 10000$

Question 17

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

Accepted Answer

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 
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

Question 18

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:

Accepted Answer

A)  3 years 
B)  6 years 
C)  the rate as determined by the Commissioner of Taxation 
D)  cannot be determined from the information provided 
A)  3 years 
B)  6 years 
C)  the rate as determined by the Commissioner of Taxation 
D)  cannot be determined from the information provided

Question 19

On 30 June 2013, 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:

Accepted Answer

A)  $88 264 
B)  $89 721 
C)  $90 771 
D)  $91 178 
A)  $88 264 
B)  $89 721 
C)  $90 771 
D)  $91 178

Question 20

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:

Accepted Answer

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

Exam 14: Leases

Which of the following is NOT a reason given by the IASB to remove the requirement to classify leases from any future accounting standard?

If a sale and leaseback transaction results in a finance lease, AASB 117 Leases, provides the following accounting treatment for any excess of sales proceeds over the carrying amount:

Which of the following is NOT one of the situations provided in AASB 117 in relation to the classification of leases as finance leases?

AASB 117 requires manufacturer and dealer lessors to recognise selling profit or loss at the:

Which of the following is included within the scope of AASB 117?

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 an operating lease arrangement?

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

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

Under AASB 117 Leases, lessors are required to account for lease receipts from operating leases as:

Timely Limited accepts a lease incentive to enter into a 4-year operating lease for equipment. The incentive is cash amounting to $10 000 that will be paid on the date the lease agreement is signed. On inception of the lease, the lessor will record:

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

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:

Accounting Regulation and the Conceptual Framework

Application of Accounting Theory

Shareholders Equity: Share Capital and Reserves

Fair Value Measurement

Revenue

Provisions, Contingent Liabilities and Contingent Assets

Income Taxes

Financial Instruments

Share-Based Payments

Translation of the Financial Statements of Foreign Entities

Employee Benefits

Inventories

Property, Plant and Equipment

Understanding Australian Accounting Standards

Impairment of Assets

Accounting for Mineral Resources

Agriculture

Financial Statement Presentation

Statement of Cash Flows

Earnings Per Share

Operating Segments

Operating Segments

Business Combinations

Consolidation: Principles and Accounting Requirements

Consolidation: Intragroup Transactions

Consolidation: Non Controlling Interest

Joint Arrangements

Associates and Joint Ventures

Filters