Deck 10: Leases

Question 1

The user of a leased asset is referred to as the:

A) vendor;
B) purchaser;
C) lessor;
D) lessee.

Answer 1

D

Question 2

Which of the following is NOT one of the situations provided in IFRS 16 Leases in relation to the classification of leases as finance leases?

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.

Answer 2

C

Question 3

On 30 June 2016, 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:

A) €88 264;
B) €89 721;
C) €90 771;
D) €91 178.

Answer 3

D

Question 4

IFRS 16 Leases deems cancellable leases with which of the following characteristics to be non-cancellable: $$\begin{array} { | l | l | l | l | l | } \hline&I&II&III&IV\\\hline \begin{array} { l } \text { Leases that can be cancelled upon the occurrence of } \\\text { some remate contingency }\end{array} & \text { No } & \text { Yes } & \text { Yes } & \text { Yes } \\\hline \begin{array} { l } \text { Leases that can be cancelled only with the permission of } \\\text { the lessor }\end{array} & \text { Yes } & \text { No } & \text { Yes } & \text { Yes } \\\hline \begin{array} { l } \text { Leases where the lessee, upon cancellation, is committed } \\\text { to enter into a further lease with the same lessor }\end{array} & \text { Yes } & \text { Yes } & \text { Yes } & \text { No } \\\hline \begin{array} { l } \text { Leases that require the lessee to pay a substantial penalty } \\\text { on cancellation }\end{array} & \text { Yes } & \text { Yes } & \text { Yes } & \text { No } \\\hline\end{array}$$

A) I;
B) II;
C) III;
D) IV.

Question 5

With respect to operating leases, lessors are required under IFRS 16 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.

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

Question 6

Nelson Ltd manufactures specialised machinery for both sale and lease. On 1 July 2016, Nelson leased a machine to Poggi Ltd. The machine cost Nelson Ltd €195 000 to manufacture, and its fair value at the inception of the lease was €212 515. The interest rate implicit in the lease is 10%, which is in line with current market rates. Under the terms of the lease, Poggi Ltd has guaranteed €25 000 of the asset's expected residual value of €37 000 at the end of the 5-year lease term. The debit to the sales revenue account in Nelson's books is:

A) €187 548;
B) €195 000;
C) €205 063;
D) €212 515.

Question 7

IFRS 16 Leases requires manufacturer and dealer lessors to recognise selling profit or loss at the:

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 8

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.

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

Question 9

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

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

Question 10

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:

A) $\begin{array} { l l r r } \mathrm { Dr } & \text { Interest expense } & 4,225 & \\\mathrm { Dr } & \text { Lease liability } & 18,775 & \\\mathrm { Cr } & \text { Cash } & & 23,000\end{array}$
B) $\begin{array} { l l r r } \mathrm { Dr } & \text { Lease liability } & 4,225 & \\\mathrm { Dr } & \text { Interest expense } & 18,775 & \\\mathrm { Cr } & \text { Cash } & & 23,000\end{array}$
C) $\begin{array} { l l r l } \mathrm { Dr } & \text { Interest expense } & 1,610 & \\\mathrm { Dr } & \text { Lease liability } & 21,390 & \\\mathrm { Cr } & \text { Cash } & & 23,000\end{array}$
D) $\begin{array} { l l r r } \mathrm { Dr } & \text { Lease liability } & 1,610 & \\\mathrm { Dr } & \text { Interest expense } & 21,390 & \\\mathrm { Cr } & \text { Cash } & & 23,000\end{array}$

Question 11

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

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 12

A finance lease is an agreement between an owner of an asset and a user of that asset wherein the:

A) legal title to property is transferred to the lessee when the first lease payment is made;
B) ownership passes to the lessor on inception date of the lease;
C) substantially all of the risks and benefits of ownership remain with the lessor;
D) usual risks and benefits of ownership are transferred to the user.

Question 13

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

A) DR Lease receivable CR Asset;
B) DR Lease receivable CR Lease liability;
C) DR Leased asset: CR Cash/Trade payables;
D) DR Leased asset CR Cash.

Question 14

Under IFRS 16 Leases, lessors are required to account for lease receipts from operating leases as:

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 15

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:

A) 3 years;
B) 6 years;
C) the rate as determined by the tax authorities;
D) cannot be determined from the information provided.

Question 16

A lessee when accounting for a lease incentive received under an operating lease treats is as a:

A) increase in rental income over the lease term;
B) increase in rental expense over the lease term;
C) reduction in rental expense over the lease term;
D) reduction in rental income over the lease term.

Question 17

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:

A) £60 359;
B) £64 170;
C) £64 584;
D) £69 000.

Question 18

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

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

Question 19

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:

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

Question 20

Which of the following is included within the scope of IFRS 16 Leases?

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 21

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:

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

Question 22

If a sale and leaseback transaction results in a finance lease, IFRS 16 Leases provides the following accounting treatment for any excess of sales proceeds over the carrying amount:

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 23

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

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 will result in a simpler accounting standard;
C) Removing the classification will result in inconsistencies in how the minimum lease payments are determined for classification purposes;
D) Removal of classification will result in similar transactions being accounted for in the same way.

Question 24

A sale and leaseback transaction involves the sale of an asset that is then leased back to the:

A) original owner;
B) acquiring entity;
C) lessor;
D) purchaser.

Question 25

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