Deck 10: Accounting for Leases

Question 1

In the case of a finance lease,the accounting treatment by the lessee could:

A)calculate the IRR implicit in the lease contract and disclose it in the notes to the accounts.
B)provide note disclosure to the accounts and recognise the lease payments in the same way as a rental expense.
C)accrue the lease payments and match them against revenues earned by using a unit of production method.
D)recognise an asset and associated liability equal in value to the present value of the minimum lease payments.

Answer 1

D

Question 2

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

Answer 2

False

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)?

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

Answer 3

$46 094

Question 4

In determining if the risk and rewards of ownership have been transferred,IAS 17 states the following would indicate a finance lease is in effect:

A)Ownership of the assets transfers at the end of the lease term for a variable payment equal to its then fair value.
B)Contingent rents exist.
C)The lease is non-cancellable by the lessor.
D)All of the given answers are correct.

Question 5

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.

Question 6

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.

Question 7

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.

Question 8

IAS 17 defines the benefits of ownership to include:

A)those obtainable from the insurance claims associated with it.
B)those obtainable from gains in the realisable value of the asset.
C)those obtainable from the profitable use of the asset.
D)those obtainable from gains in the realisable value of the asset and those obtainable from the profitable use of the asset.

Question 9

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

Question 10

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.

Question 11

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

Question 12

If a lease transfers ownership of the property to the lessee,or contains a bargain purchase option,then this is consistent with the lease being an operating lease.

Question 13

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.

Question 14

The term 'bargain purchase option' is not used explicitly in IAS 17 but is described as:

A)the option to purchase the leased asset for significantly less than its cost at the date the option becomes exercisable, for it to be reasonably certain at the inception of the lease, that the option will be exercised.
B)the option to purchase the asset at a price that is expected to be sufficiently lower that the fair value at the date the option becomes exercisable, for it to be reasonably certain at the inception of the lease, that the option will be exercised.
C)being in place when the lessee is guaranteed to undertake the option at the end of the lease.
D)the option to purchase the asset at a price that is expected to be sufficiently lower that the fair value at the date the option becomes exercisable, for it to be reasonably certain at the inception of the lease, that the option will be exercised and being in place when the lessee is guaranteed to undertake the option at the end of the lease.

Question 15

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.

Question 16

Minimum lease payments include:

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

Question 17

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

Question 18

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

Question 19

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.

Question 20

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.

Question 21

Mitchum Ltd entered into a lease agreement on 1 July 2013 to lease equipment on the following terms: $$\begin{array} { | l | r | l | } \hline \text { Duration of lease } & 4 \text { years } & \\\hline \text { Useful life of leased asset } & 8 \text { years } & \\\hline \text { Guaranteed residual } & \$ 1,500 & \\\hline \text { Lease payments (in arrears) } & \$ 3,500 & \begin{array} { l } \text { per year (4 payments) } \\\text { due 30 June }\end{array} \\\hline\end{array}$$ 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?

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

Question 22

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

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 23

Joplin Ltd entered into a lease agreement on 1 July 2013 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 2014?

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 24

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?

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 25

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? $\begin{array}{|c|c|c|c|}\hline \text { Date } & \begin{array}{c}\text { Lease } \\\text { payment }\end{array} & \begin{array}{c}\text { Interest } \\\text { expense }\end{array} & \begin{array}{c}\text { Present value of } \\\text { lease liability }\end{array} \\\hline \text { 01 July 2009 } & & & 21506 \\\hline \text { 30 June 2010 } & 3500 & 2151 & ? \\\hline\end{array}$

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 26

Medusa Plc enters into a non-cancellable 10-year lease with Lennox Plc 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 Plc 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 Plc for 1 July 2013 and 30 June 2014 (round amounts to the nearest pound)?

A) 01 July 2013
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Lease receivable } & 322572 & \\\hline \mathrm{Cr} & \text { Cash } & & 322572 \\\hline\end{array}$

$30 \text { June } 2014$
$\begin{array}{|c|l|r|r|}\hline \mathrm{Dr} & \text { Cash } & 50000 & \\\hline \mathrm{Cr} & \text { Interest revenue } & & 29032 \\\hline \mathrm{Cr} & \text { Lease receivable } & & 20968 \\\hline \mathrm{Dr} & \text { Lease receivable } & 5000 & \\\hline \mathrm{Cr} & \text { Executory expense recoupment } & & 5000 \\\hline\end{array}$
B) 01 July 2013
$\begin{array}{|r|l|r|r|}\hline \mathrm{Dr} & \text { Equipment } & 322572 & \\\hline \mathrm{Cr} & \text { Cash } & & 322572 \\\hline & & & \\\hline \mathrm{Dr} & \text { Lease receivable } & 320883 & \\\hline \mathrm{Dr} & \text { Loss on lease agreement } & 1689 & \\\hline \mathrm{Cr} & \text { Equipment } & & 322572 \\\hline\end{array}$

$30 \text { June } 2014$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Cash } & 55000 & \\\hline \mathrm{Cr} & \text { Interest revenue } & & 28879 \\\hline \mathrm{Cr} & \text { Lease receivable } & & 26121 \\\hline\end{array}$
C) 01 July 2013
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Equipment } & 322572 & \\\hline \mathrm{Cr} & \text { Cash } & & 322572 \\\hline & & & \\\hline \mathrm{Dr} & \text { Lease receivable } & 272572 & \\\hline \mathrm{Dr} & \text { Deferred executory costs } & 50000 & \\\hline \mathrm{Cr} & \text { Equipment } & & 322572\\\hline\end{array}$

$30 \text { June } 2014$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Cash } & 50000 & \\\hline \mathrm{Cr} & \text { Interest revenue } & & 24531 \\\hline \mathrm{Cr} & \text { Lease receivable } & & 25469 \\\hline & & & \\\hline \mathrm{Dr} & \text { Cash } & 5000 & \\\hline \mathrm{Cr} & \text { Deferred executory costs } & & 5000 \\\hline\end{array}$
D) 01 July 2013
$\begin{array}{|c|l|l|l|}\hline \mathrm{Dr} & \text { Equipment } & 322572 & \\\hline \mathrm{Cr} & \text { Cash } & & 322572 \\\hline & & & \\\hline \mathrm{Dr} & \text { Lease receivable } & 322572 & \\\hline \mathrm{Cr} & \text { Equipment } & & 322572 \\\hline\end{array}$


$30 \text { June } 2014$
$\begin{array}{|c|l|l|l|}\hline \mathrm{Dr} & \text { Equipment } & 322572 & \\\hline \mathrm{Cr} & \text { Cash } & & 322572 \\\hline & & & \\\hline \mathrm{Dr} & \text { Lease receivable } & 322572 & \\\hline \mathrm{Cr} & \text { Equipment } & & 322572 \\\hline\end{array}$

Question 27

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? $$\begin{array} { | c | c | c | c | } \hline \text { Date } & \begin{array} { c } \text { Lease } \\\text { payment }\end{array} & \begin{array} { c } \text { Interest } \\\text { expense }\end{array} & \begin{array} { c } \text { Present value of } \\\text { lease liability }\end{array} \\\hline 01 \text { July } 2011 & & & 21506 \\\hline \text { 30 June 2012 } & 3500 & 2,151 & ? \\\hline\end{array}$$

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

Question 28

Cobalt Plc 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 Plc 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 euro)?

A) 01 July 2013
$\begin{array}{|c|l|c|c|}\hline \mathrm{Dr} & \text { Machine } & 533493 & \\\hline \mathrm{Cr} & \text { Cash } & & 533493 \\\hline & & & \\\hline \mathrm{Dr} & \text { Lease receivable } & 533493 & \\\hline \mathrm{Cr} & \text { Lease payable } & & 533493 \\\hline\end{array}$

$30 \text { June } 2014$
$\begin{array}{|c|l|c|c|}\hline \mathrm{Dr} & \text { Cash } & 100000 & \\\hline \mathrm{Cr} & \text { Interest revenue } & & 53349 \\\hline \mathrm{Cr} & \text { Lease receivable } & & 46651 \\\hline & & & \\\hline \mathrm{Dr} & \text { Depreciation machine } & 66687 & \\\hline \mathrm{Cr} & \text { Accumulated depreciation machine } & & 66687 \\\hline\end{array}$
B) 01 July 2013
$\begin{array}{|c|l|c|c|}\hline \mathrm{Dr} & \text { Machine } & 533493 & \\\hline \mathrm{Cr} & \text { Cash } & & 533493 \\\hline & & & \\\hline \mathrm{Dr} & \text { Lease receivable } & 533493 & \\\hline \mathrm{Cr} & \text { Machine } & & 533493 \\\hline\end{array}$

$30 \text { June } 2014$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Cash } & 100000 & \\\hline \mathrm{Cr} & \text { Interest revenue } & & 53349 \\\hline \mathrm{Cr} & \text { Lease receivable } & & 46651 \\\hline\end{array}$
C) 01 July 2013
$\begin{array}{|c|l|r|r|}\hline \mathrm{Dr} & \text { Machine } & 500000 & \\\hline \mathrm{Dr} & \text { Loss on machine } & 33493 & \\\hline \mathrm{Cr} & \text { Cash } & & 533493 \\\hline & & & \\\hline \mathrm{Dr} & \text { Lease receivable } & 533493 & \\\hline \mathrm{Cr} & \text { Machine } & & 500000 \\\hline \mathrm{Cr} & \text { Loss on machine } & & 33493 \\\hline\end{array}$

$30 \text { June } 2014$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Cash } & 100000 & \\\hline \mathrm{Cr} & \text { Interest revenue } & & 100000 \\\hline\end{array}$

D) 01 July 2013
$\begin{array}{|c|l|c|c|}\hline \mathrm{Dr} & \text { Machine } & 533493 & \\\hline \mathrm{Cr} & \text { Cash } & & 533493 \\\hline & & & \\\hline \mathrm{Dr} & \text { Lease receivable } & 533493 & \\\hline \mathrm{Cr} & \text { Machine } & & 533493 \\\hline\end{array}$

$\text { 30 June } 2014$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Cash } & 100000 & \\\hline \mathrm{Cr} & \text { Lease revenue } & & 100000 \\\hline\end{array}$

Question 29

Lease incentives are:

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 30

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?

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

Question 31

Where there is a lease involving a manufacturer or dealer:

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 32

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

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 33

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

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 34

Gerbert Plc enters into a finance lease with Hokiman Plc 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 Plc €190 000 to manufacture the machine.What are the entries in the books of Gerbert Plc for 1 July 2012 and 30 June 2013 (round amounts to the nearest euro)?

A) $$\begin{array}{l}01 \text { July } 2012\\\begin{array} { | c | l | c | c | } \hline \mathrm { Dr } & \text { Lease receivable } & 226718 & \\\hline \mathrm { Cr } & \text { Machine } & & 226718 \\\hline & & \\\hline{ \text {June } 30,2013 } & & \\\hline \mathrm { Dr } & \text { Cash } & 62000 & \\\hline \mathrm { Cr } & \text { Interest revenue } & & 13603 \\\hline \mathrm { Cr } & \text { Lease receivable } & & 48397 \\\hline\end{array}\end{array}$$
B) $01 \text { July } 2012$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Lease receivable } & 226718 & \\\hline \mathrm{Dr} & \text { Cost of sales } & 190000 & \\\hline \mathrm{Cr} & \text { Inventory } & & 190000 \\\hline \mathrm{Cr} & \text { Sales } & & 226718 \\\hline\end{array}$

$30 \text { June } 2013$
$\begin{array}{|c|l|c|c|}\hline\mathrm{Dr} & \text { Cash } & 62000 & \\\hline \mathrm{Cr} & \text { Interest revenue } & & 13603 \\\hline \mathrm{Cr} & \text { Lease receivable } & & 48397\\\hline\end{array}$
C) 01 July 2012
$\begin{array}{|c|l|c|c|}\hline \mathrm{Dr} & \text { Lease receivable } & 226718 & \\\hline \mathrm{Cr} & \text { Machine } & & 190000 \\\hline \mathrm{Cr} & \text { Deferred gain } & & 36718 \\\hline\end{array}$

$30 \text { June } 2013$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Cash } & 62000 & \\\hline \mathrm{Dr} & \text { Deferred gain } & 9180 & \\\hline \mathrm{Cr} & \text { Interest revenue } & & 13603 \\\hline \mathrm{Cr} & \text { Lease receivable } & & 57577 \\\hline\end{array}$
D) 01 July 2012
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Lease receivable } & 263000 & \\\hline \mathrm{Cr} & \text { Unearned interest } & & 36282 \\\hline \mathrm{Cr} & \text { Machine } & & 226718 \\\hline\end{array}$


$30 \text { June } 2013$
$\begin{array}{|r|l|r|r|}\hline \mathrm{Dr} & \text { Cash } & 62000 & \\\hline \mathrm{Cr} & \text { Unearned interest } & & 9071 \\\hline \mathrm{Cr} & \text { Lease receivable } & & 52929 \\\hline\end{array}$

Question 35

A non-cancellable lease is a lease that is cancellable only:

A)upon the occurrence of some probable contingency.
B)with the permission of the lessee.
C)if the lessee enters into a new lease for the same or equivalent asset with the same lessor.
D)upon payment by the lessor of such an additional amount that, at inception of the lease, continuation of the lease is certain.

Question 36

A lease involving 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 37

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

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 38

Cobalt Plc 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 Plc 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 euro)?

A) $\begin{array}{l}01 \text { July } 2013\\\begin{array}{|c|l|r|r|}\hline & & & \\\hline \mathrm{Dr} & \text { Cash } & 533493 & \\\hline \mathrm{Dr} & \text { Accumulated depreciation-machine } & 200000 & \\\hline \mathrm{Cr} & \text { Machine } & & 700000 \\\hline \mathrm{Cr} & \text { Deferred gain } & & 33493 \\\hline\\\hline \text { Dr } & \text { Leased machine } & 533493 & \\\hline \mathrm{Cr} & \text { Lease liability } & & 533493\\\hline\\\hline 30 \text { June } 2014\\\hline & & & \\\hline \mathrm{Dr} & \text { Interest expense } & 53349 & \\\hline \mathrm{Dr} & \text { Lease liability } & 46651 & \\\hline \mathrm{Cr} & \text { Cash } & & 100000 \\\hline\\\hline \text { Dr } & \text { Amortisation of leased asset } & 66687 & \\\hline \text { Dr } & \text { Accumulated leased machine amortisation } & & 66687 \\\hline & & & \\\hline \mathrm{Dr} & \text { Deferred gain } & 4187 & \\\hline \mathrm{Cr} & \text { Profit on sale of leased asset } & & 4187 \\\hline\end{array}\end{array}$

B) $\begin{array}{l}01 \text { July } 2013\\\begin{array}{|c|l|r|r|}\hline & & & \\\hline \mathrm{Dr} & \text { Cash } & 533493 & \\\hline \mathrm{Dr} & \text { Accumulated depreciation-machine } & 200000 & \\\hline \mathrm{Cr} & \text { Machine } & & 700000 \\\hline \mathrm{Cr} & \text { Gain on sale of machine } & & 33493 \\\hline\\\hline30 \text { June } 2014\\\hline & & & \\\hline \mathrm{Dr} & \text { Rent expense } & 100000 & \\\hline \mathrm{Cr} & \text { Cash } & & 100000 \\\hline\end{array}\end{array}$

C) 01 July 2013
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Cash } & 533493 & \\\hline \mathrm{Dr} & \text { Accumulated depreciation-machine } & 200000 & \\\hline \mathrm{Cr} & \text { Machine } & & 700000 \\\hline \mathrm{Cr} & \text { Deferred gain } & & 33493\\\hline\end{array}$


$30 \text { June } 2014$
$\begin{array}{|r|l|r|r|}\hline & & & \\\hline \mathrm{Dr} & \text { Rent expense } & 100000 & \\\hline \mathrm{Cr} & \text { Cash } & & 100000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Deferred gain } & 4187 & \\\hline \mathrm{Cr} & \text { Profit on sale of leased asset } & & 4187 \\\hline\end{array}$
D) $\begin{array}{l}01 \text { July } 2013\\\begin{array}{|l|l|r|r|}\hline & & & \\\hline \mathrm{Dr} & \text { Cash } & 533493 & \\\hline \mathrm{Dr} & \text { Accumulated depreciation-machine } & 200000 & \\\hline \mathrm{Cr} & \text { Machine } & & 700000 \\\hline \mathrm{Cr} & \text { Deferred gain } & & 33493\\\hline & & & \\\hline \mathrm{Dr} & \text { Leased machine } & 533493 & \\\hline \mathrm{Cr} & \text { Lease liability } & & 533493 \\\hline\\\hline30 \text { June } 2014\\\hline & & & \\\hline \mathrm{Dr} & \text { Rent expense } & 95813 & \\\hline \mathrm{Dr} & \text { Deferred gain } & 4187 & \\\hline \mathrm{Cr} & \text { Cash } & & 100000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Amortisation of leased asset } & 66687 & \\\hline \mathrm{Dr} & \text { Accumulated leased machine amortisation } & & 66687 \\\hline\end{array}\end{array}$

Question 39

For a depreciable asset,the amount of depreciation recognised shall be in accordance with IAS 16.The asset shall be:

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 40

Quaid Ltd entered into a lease agreement on 1 July 2013 to lease equipment on the following terms: $$\begin{array} { | l | r | l | } \hline \text { Duration of lease } & 3 \text { years } & \\\hline \text { Useful life of leased asset } & 9 \text { years } & \\\hline \text { Lease payments (in arrears) } & \$ 4,000 & \begin{array} { l } \text { per year (3 payments) } \\\text { due 30 June }\end{array} \\\hline\end{array}$$ 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 2014?

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 41

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)?

A)Land normally has an indefinite economic life.
B)Land being leased normally has a building on it.
C)Land is a tangible asset.
D)Land title must be transferred only by law.

Question 42

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?

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

Question 43

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

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 44

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

Question 45

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

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 46

Lease rentals representing a recovery of material executory costs are to be treated by the lessor as:

A)expenses of the financial years in which the related costs incurred.
B)expenses at inception when the related costs incurred.
C)revenue of the financial years in which the related costs incurred.
D)revenue at inception when the related costs incurred.

Question 47

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: $$\begin{array} { | l | r | } \hline \text { Fair value of equipment } & \$ 200000 \\\hline \text { Economic life of the equipment } & 12 \text { years } \\\hline \text { Minimum lease payments } & \$ 120000 \\\hline \text { Executory costs } & \$ 5,000 \\\hline\end{array}$$ What is the amount to be recorded as an asset and a liability in the books of the lessee that is in accordance with IAS 17 Leases?

A)$0
B)$120 000
C)$125 000
D)$200 000

Question 48

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

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 49

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?

Question 50

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

Question 51

Paragraph 47 of IAS 17 requires that for a finance lease,the lessor must disclose:

A)the unguaranteed residual values accruing to the lessor.
B)earned 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 52

The following is an extract from a lease payment schedule for Lipton Pty Plc.What is the present value of the lease liability at 30 June 2012? $\begin{array}{|r|l|l|c|}\hline {\text { Date }} & \begin{array}{l}\text { Lease } \\\text { payment }\end{array} & \begin{array}{l}\text { Interest } \\\text { expense }\end{array} & \begin{array}{l}\text { Present value of } \\\text { lease liability }\end{array} \\\hline \text { 1-Jul-11 } & & & 17039 \\\hline 30 \text {-Jun-12 } & 3500 & 1704 & ? \\\hline\end{array}$

A)€13 539
B)€15 335
C)€15 243
D)€11 835

Question 53

Snowy River Plc 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 Plc classify Lease A and Lease B respectively?

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

Question 54

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 $$\begin{array} { | l | l | r | l | } \hline \mathrm { Dr } & \text { Executory expense } & 10000 & \\\hline \mathrm { Dr } & \text { Interest expense } & 13000 & \\\hline \mathrm { Dr } & \text { Lease liability } & 87000 & \\\hline \mathrm { Cr } & \text { Cash } & & 110000 \\\hline\end{array}$$

A)€87000
B)€93000
C)€97000
D)€100000

Question 55

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: $$\begin{array} { | c | r | r | r | } \hline \text { Period } & \text { Present value of an annuity of } \$ 1 \\\hline & 10 \% & 12 & 16 \\\hline 1 & 0.9091 & 0.8929 & 0.8621 \\\hline 2 & 1.7355 & 1.6091 & 1.6052 \\\hline 3 & 2.4869 & 2.4018 & 2.2459 \\\hline 4 & 3.1699 & 3.0373 & 2.7982 \\\hline 5 & 3.7908 & 3.6548 & 3.2743 \\\hline\end{array}$$ What is the implicit rate of this lease arrangement in accordance with IAS 17?

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

Question 56

At inception of the lease,what is the cost basis of an asset acquired from a lease arrangement when the lease is classified as a finance lease?

A)The net realisable value of the asset plus present value of the minimum lease payments.
B)The fair value of the leased asset.
C)The lower of fair value of the leased asset or present value of the minimum lease payments.
D)The lower of fair value of the leased asset or present value of the minimum lease payments plus any initial indirect costs.

Question 57

Explain what is meant by a 'direct finance' lease,and how such leases should be accounted under IAS 17.

Question 58

The following journal entry,in the books of Lessee Pty Plc,records the entry for the depreciation expense at 30 June 2014.The lease term is of five years duration.Which of the following statements is correct?
30 June 2014 $$\begin{array} { | l | l | l | l | } \hline \text { Dr } & \text { Lease depreciation expense } & 103274 & \\\hline \mathrm { Cr } & \text { Accumulated depreciation-leased asset } & & 103274 \\\hline\end{array}$$ (to record depreciation expense [(£739,648 - £120,000)/6]

A)The economic life of the asset is six 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 six years; and it is reasonably certain that the lessee will obtain ownership of the asset at the end of the lease term.

Question 59

For a lessee entering into a finance lease,initial direct costs are:

A)expensed immediately.
B)expensed at the end of the lease term.
C)capitalised as part of the lease receivable.
D)capitalised as part of the cost of the leased asset.

Question 60

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

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 61

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.

Question 62

Explain the accounting treatment for a lease arrangement involving both land and building.

Question 63

Explain the benefits of a sale and leaseback transaction.

Question 64

Discuss the presentation and disclosure requirements of operating leases under IAS 17.