Full Test Bank Ch.11 Deegan Accounting for assets

Chapter 11 Testbank

1. The required disclosure by a lessee is to disclose a lease asset and lease liability in their balance sheet for leases that are operating leases.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

2. The discount rate to be used in calculating the present value of the minimum lease payments is the interest rate implicit to the lease, or if this is not practicable to do so, the lessor's incremental borrowing rate.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Learning Objective: 11-08 Understand what interest rate shall be used to calculate the present value of lease-related assets and liabilities.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

3. 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. 

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-03 Understand the core principle and the scope of the accounting standard pertaining to leases.
Section: Accounting for leases by lessors
Topic: Accounting for leases by lessors
 

4. A leased asset is not subject to depreciation or amortisation in the books of the lessee.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

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.  

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

6. 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.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-01 Be aware of some recent significant changes in the rules that apply when accounting for leases, and be aware of the implications these changes have for financial statements.
Section: An overview of recent developments in the accounting requirements pertaining to accounting for leases
Topic: An overview of recent developments in the accounting requirements pertaining to accounting for leases
 

7. AASB 117 applies to accounting for leases, including those that relate to lease arrangements to explore for or use natural resources.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-03 Understand the core principle and the scope of the accounting standard pertaining to leases.
Section: An overview of recent developments in the accounting requirements pertaining to accounting for leases
Topic: An overview of recent developments in the accounting requirements pertaining to accounting for leases
 

8. 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.  

AACSB: Analytic
Difficulty: Easy
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

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

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-10 Understand that for lessors, leases can be classified as either finance leases or operating leases, and that finance leases can be further subclassified as direct financing leases or dealer- or manufacturer-type leases, and understand how to account for such leases.
Section: Accounting for leases by lessors
Topic: Finance lease
 

10. 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.  

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-10 Understand that for lessors, leases can be classified as either finance leases or operating leases, and that finance leases can be further subclassified as direct financing leases or dealer- or manufacturer-type leases, and understand how to account for such leases.
Section: Accounting for leases by lessees
Section: An overview of recent developments in the accounting requirements pertaining to accounting for leases
Topic: Operating leases
 

11. 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.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-10 Understand that for lessors, leases can be classified as either finance leases or operating leases, and that finance leases can be further subclassified as direct financing leases or dealer- or manufacturer-type leases, and understand how to account for such leases.
Section: Accounting for leases by lessors
Topic: Accounting for leases by lessors
 

12. In the situation where there is an unguaranteed residual in a 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.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

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

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

14. At the commencement of the lease term, lessees are to recognise leases as assets and liabilities in their statements of financial position measured at the lower of the fair value of the leased asset and the present value of minimum lease payment, determined at the inception of the lease.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-06 Understand that a customer (lessee) leasing assets shall recognise assets and liabilities arising from a lease.
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

15. 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 profit or loss and other comprehensive income in the year of the sale.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-01 Be aware of some recent significant changes in the rules that apply when accounting for leases, and be aware of the implications these changes have for financial statements.
Section: An overview of recent developments in the accounting requirements pertaining to accounting for leases
Topic: An overview of recent developments in the accounting requirements pertaining to accounting for leases
 

16. 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.  

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-10 Understand that for lessors, leases can be classified as either finance leases or operating leases, and that finance leases can be further subclassified as direct financing leases or dealer- or manufacturer-type leases, and understand how to account for such leases.
Learning Objective: 11-11 Understand how, from the lessor's (supplier's) perspective, to measure a lease receivable, be able to measure lease-related revenues, and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

17. AASB 117 defines 'major part' of the economic life of the asset as 75%.  

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-08 Understand what interest rate shall be used to calculate the present value of lease-related assets and liabilities.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

18. 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.  

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

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

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

20. Prior to the introduction of the revised IFRS 16 Leases in January 2016, the majority of leases were classified as operating leases and the lease liability and lease asset did not appear on the lessee's statement of financial position.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

21. Under the pre-January 2016 issued IFRS 16 Leases, a lease would be classified as a finance lease if the lease term was for a major part of the economic life of the asset.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-01 Be aware of some recent significant changes in the rules that apply when accounting for leases, and be aware of the implications these changes have for financial statements.
Section: An overview of recent developments in the accounting requirements pertaining to accounting for leases
Topic: An overview of recent developments in the accounting requirements pertaining to accounting for leases
 

22. Under the pre-January 2016 issued IFRS 16 Leases, a lease would be classified as an operating lease if it was non-cancellable and the asset was transferred to the lessee at the end of the lease period.  

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-01 Be aware of some recent significant changes in the rules that apply when accounting for leases, and be aware of the implications these changes have for financial statements.
Section: An overview of recent developments in the accounting requirements pertaining to accounting for leases
Topic: An overview of recent developments in the accounting requirements pertaining to accounting for leases
 

23. The pre-January 2016 issued IFRS 16 condition of 'major part of the economic life' of the asset is an example of a principle-based rather than a rule-based condition.  

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-01 Be aware of some recent significant changes in the rules that apply when accounting for leases, and be aware of the implications these changes have for financial statements.
Section: An overview of recent developments in the accounting requirements pertaining to accounting for leases
Topic: An overview of recent developments in the accounting requirements pertaining to accounting for leases
 

24. The central accounting issue associated with leases is: 

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.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-01 Be aware of some recent significant changes in the rules that apply when accounting for leases, and be aware of the implications these changes have for financial statements.
Section: An overview of recent developments in the accounting requirements pertaining to accounting for leases
Topic: An overview of recent developments in the accounting requirements pertaining to accounting for leases
 

25. An operating lease under the former AASB 117 was one in which: 

A. the lessee agrees to maintain the operating capability of the asset to a level specified by the lessor.
B. the risks and benefits of ownership reside with the lessor.
C. the lessee is required to maintain the leased asset according to an agreed maintenance schedule.
D. the risks and benefits of ownership reside with the lessor and the lessee is required to maintain the leased asset according to an agreed maintenance schedule.

AACSB: Reflective thinking
Difficulty: Easy
Section: Accounting for leases by lessors
Section: An overview of recent developments in the accounting requirements pertaining to accounting for leases
Topic: Accounting for leases by lessors
 

26. In the case of a 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.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

27. The term 'bargain purchase option' is not used explicitly in AASB 117 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 exercise price of a purchase option if the lessee is reasonably certain to exercise that option.
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.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees 

28. 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.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-10 Understand that for lessors, leases can be classified as either finance leases or operating leases, and that finance leases can be further subclassified as direct financing leases or dealer- or manufacturer-type leases, and understand how to account for such leases.
Section: Accounting for leases by lessors
Topic: Accounting for leases by lessors

29. Kensington Ltd decides to lease some equipment from Piccadilly Ltd on the following terms:

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

 
AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees

30. Johnson Ltd enters into a lease agreement with Peterson Ltd under the following conditions:

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 under the former AASB 117?

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

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-01 Be aware of some recent significant changes in the rules that apply when accounting for leases, and be aware of the implications these changes have for financial statements.
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

31. In circumstances where the lessee is unable to determine the implicit interest rate in a lease agreement, AASB 117 requires the lessee to use: 

A. the incremental lending rate of the lessor.
B. the weighted average cost of capital of the lessee.
C. the incremental borrowing rate of the lessee.
D. the internal rate of return on similar projects adopted by the lessor.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees

32. Hoof & Tail Ltd enters into a non-cancellable lease agreement with Equine Industries to lease some equipment under the following conditions:

The interest rate implicit in the lease is 11% and the fair value of the asset at the inception of the lease is $37 031. What are the journal entries to record the lease, the payment at lease inception and the first lease payment in the books of the lessee (rounded to the nearest dollar)?

A. 

B.

C.

D.

 
AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

33.  Fresco Ltd enters into a non-cancellable lease agreement with Meola Ltd to lease some equipment under the following conditions:

The interest rate implicit in the lease is 9% and the fair value of the asset at the inception of the lease is $81 199. What are the journal entries to record the lease payment at inception of the lease and the next two lease payments in the books of the lessee (rounded to the nearest dollar)?

A.

B.

C. 

D. 

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

34. Joplin Ltd entered into a lease agreement on 1 July 2012 with Thomas Ltd. The terms of the lease are as follows:

The interest rate implicit in the lease is 6% and the fair value of the leased asset at the inception of the lease is $20 517. The lease is non-cancellable and at the end of the lease the asset is returned to the lessor. The economic benefits provided by the lease asset are expected to be consumed evenly over its life. What is the value of the lease asset and lease liability in the books of the lessee after adjusting entries made on 30 June 2013?

 
A. lease asset: $17 908; lease liability: $18 064
B. lease asset: $21 352; lease liability: $21 954
C. lease asset: $18 465; lease liability: $18 188
D. lease asset: $17 460; lease liability: $17 004

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

35. Mitchum Ltd entered into a lease agreement on 1 July 2013 to lease equipment on the following terms:

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. 

 
B. 

C. 

D. 

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

36. The rental payments made during the term of a 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).

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees

37. Where a lessor is involved in a lease, the lessor will typically: 

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. record only 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.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-10 Understand that for lessors, leases can be classified as either finance leases or operating leases, and that finance leases can be further subclassified as direct financing leases or dealer- or manufacturer-type leases, and understand how to account for such leases.
Learning Objective: 11-12 Understand that for lessors, a lease receivable will often be substituted for the underlying asset that is the subject of the lease.
Section: Accounting for leases by lessors
Topic: Accounting for leases by lessors
 

38. A finance lease in which the lessor provides the financial resources to acquire an asset and retains ownership while the control of the asset and the risks and benefits of ownership pass to the lessee, may be considered from the perspective of the lessor to be a(n): 

A. sales-type lease.
B. operating lease.
C. direct finance lease.
D. executory lease.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-10 Understand that for lessors, leases can be classified as either finance leases or operating leases, and that finance leases can be further subclassified as direct financing leases or dealer- or manufacturer-type leases, and understand how to account for such leases.
Section: Accounting for leases by lessors
Topic: Accounting for leases by lessors
 

39. 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.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-10 Understand that for lessors, leases can be classified as either finance leases or operating leases, and that finance leases can be further subclassified as direct financing leases or dealer- or manufacturer-type leases, and understand how to account for such leases.
Learning Objective: 11-11 Understand how, from the lessor's (supplier's) perspective, to measure a lease receivable, be able to measure lease-related revenues, and be able to prepare the related accounting journal entries.
Learning Objective: 11-12 Understand that for lessors, a lease receivable will often be substituted for the underlying asset that is the subject of the lease.
Section: Accounting for leases by lessors
Topic: Accounting for leases by lessors
 

40. 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.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-10 Understand that for lessors, leases can be classified as either finance leases or operating leases, and that finance leases can be further subclassified as direct financing leases or dealer- or manufacturer-type leases, and understand how to account for such leases.
Section: Accounting for leases by lessors
Topic: Accounting for leases by lessors

41. 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)? 

A. 

B.

C.

D.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-10 Understand that for lessors, leases can be classified as either finance leases or operating leases, and that finance leases can be further subclassified as direct financing leases or dealer- or manufacturer-type leases, and understand how to account for such leases.
Learning Objective: 11-11 Understand how, from the lessor's (supplier's) perspective, to measure a lease receivable, be able to measure lease-related revenues, and be able to prepare the related accounting journal entries.
Learning Objective: 11-12 Understand that for lessors, a lease receivable will often be substituted for the underlying asset that is the subject of the lease.
Section: Accounting for leases by lessors
Topic: Accounting for leases by lessors
 

42. 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.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-10 Understand that for lessors, leases can be classified as either finance leases or operating leases, and that finance leases can be further subclassified as direct financing leases or dealer- or manufacturer-type leases, and understand how to account for such leases.
Section: Accounting for leases by lessors
Topic: Accounting for leases by lessors
 

43. 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.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-10 Understand that for lessors, leases can be classified as either finance leases or operating leases, and that finance leases can be further subclassified as direct financing leases or dealer- or manufacturer-type leases, and understand how to account for such leases.
Section: Accounting for leases by lessors
Topic: Accounting for leases by lessors

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

A. 

B. 

C.

D. 

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-10 Understand that for lessors, leases can be classified as either finance leases or operating leases, and that finance leases can be further subclassified as direct financing leases or dealer- or manufacturer-type leases, and understand how to account for such leases.
Learning Objective: 11-11 Understand how, from the lessor's (supplier's) perspective, to measure a lease receivable, be able to measure lease-related revenues, and be able to prepare the related accounting journal entries.
Learning Objective: 11-12 Understand that for lessors, a lease receivable will often be substituted for the underlying asset that is the subject of the lease.
Section: Accounting for leases by lessors
Topic: Accounting for leases by lessors
 

45. Schwann Ltd 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 Ltd 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 Ltd? 

A. 

B. 

C. 

D. 

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

46. 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.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessors
Topic: Accounting for leases by lessors
 

47. Lease incentives are: 

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. covered by AASB 117 and capitalised into lease payments.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

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

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

49. 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?

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

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees

50. 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?

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

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

51. For a lessee entering into a direct 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.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees

52. The following journal entry, in the books of Lessee Pty Limited, records the lease payment made at 30 June 2012. 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 2012

 
A. 87 000
B. 93 000
C. 97 000
D. 100 000

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

53. The following journal entry, in the books of Lessee Pty Limited, records the entry for the depreciation expense at 30 June 2012. The lease term is of 5 years duration. Which of the following statements is correct?

30 June 2012

(to record depreciation expense [(739 648 - 120 000)/6]

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

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

54. 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

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-10 Understand that for lessors, leases can be classified as either finance leases or operating leases, and that finance leases can be further subclassified as direct financing leases or dealer- or manufacturer-type leases, and understand how to account for such leases.
Section: Accounting for leases by lessors
Topic: Accounting for leases by lessors
 

55. 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.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-10 Understand that for lessors, leases can be classified as either finance leases or operating leases, and that finance leases can be further subclassified as direct financing leases or dealer- or manufacturer-type leases, and understand how to account for such leases.
Section: Accounting for leases by lessors
Topic: Accounting for leases by lessors
 

56. 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:

What is the amount to be recorded as an asset and a liability in the books of the lessee that is in accordance with AASB 117 Leases?

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

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-06 Understand that a customer (lessee) leasing assets shall recognise assets and liabilities arising from a lease.
Learning Objective: 11-07 Understand how, from the lessee's perspective, to measure lease assets (which are 'rights-of-use' assets) and lease liabilities, be able to measure lease-related expenses (which would typically include interest expense and amortisation expense), and be able to prepare the related accounting journal entries.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

57. 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 $75 964.The following information is also available:

What is the implicit rate of this lease arrangement in accordance with AASB 117?

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

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 11-08 Understand what interest rate shall be used to calculate the present value of lease-related assets and liabilities.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

58. 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?

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

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-08 Understand what interest rate shall be used to calculate the present value of lease-related assets and liabilities.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

59. Paragraph 47 of AASB 117 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.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-10 Understand that for lessors, leases can be classified as either finance leases or operating leases, and that finance leases can be further subclassified as direct financing leases or dealer- or manufacturer-type leases, and understand how to account for such leases.
Section: Accounting for leases by lessors
Topic: Accounting for leases by lessors
 

60. 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.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-10 Understand that for lessors, leases can be classified as either finance leases or operating leases, and that finance leases can be further subclassified as direct financing leases or dealer- or manufacturer-type leases, and understand how to account for such leases.
Section: Accounting for leases by lessors
Topic: Accounting for leases by lessors
 

61. 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.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-10 Understand that for lessors, leases can be classified as either finance leases or operating leases, and that finance leases can be further subclassified as direct financing leases or dealer- or manufacturer-type leases, and understand how to account for such leases.
Section: Accounting for leases by lessors
Topic: Accounting for leases by lessors
 

62. 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

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 11-10 Understand that for lessors, leases can be classified as either finance leases or operating leases, and that finance leases can be further subclassified as direct financing leases or dealer- or manufacturer-type leases, and understand how to account for such leases.
Section: Accounting for leases by lessors
Topic: Accounting for leases by lessors
 

63. The following is an extract from a lease payment schedule for Lipton Pty Limited. What is the present value of the lease liability at 30 June 2012?

A. 13 539
B. 15 335
C. 15 243
D. 11 835

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 11-08 Understand what interest rate shall be used to calculate the present value of lease-related assets and liabilities.
Section: Accounting for leases by lessees
Topic: Accounting for leases by lessees
 

Chapter 11 Testbank Summary