Leases - Test Bank | 9e

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Chapter 11 Testbank

1. According to the former accounting standard AASB 117, if a lease transfers ownership of the property to the lessee, or contains a bargain purchase option, and the lease is non-cancellable then this is consistent with the lease being an operating lease.

True   False

2. Lessor can determine whether a lease is an operating lease or a finance lease based on various factors such as 'major part of the economic life' of the asset’. There is no specific guideline as to what constitutes ‘major part’ and therefore it is to be determined according to professional judgement.

True   False

3. The core principle of the new accounting standard (AASB 116) is that an entity shall recognise assets and liabilities arising from a lease.

True   False

4. According to AASB 16, an entity that provides the right to use an underlying asset for a period of time in exchange for consideration is termed as Lessor.

True   False

5. AASB 16 requires that the lease component of the contract must be considered separately from the service contract.

True   False

6. The central accounting issue associated with the former accounting standard on leases is:

A. that the timing of the recognition of the lease payments was difficult to ascertain

B. that many leased assets and associated liabilities were not being recorded on balance sheets

C. that the treatment of provisions for the repairs and maintenance on leased assets was not provided

D. that the method of recording any guaranteed value of the asset at the end of the lease term was not provided

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

A. the lease is a non-cancellable lease

B. the risks and benefits of ownership reside with the lessor.

C. the lease term is for the major economic life of the asset

D. the risks and benefits of ownership reside with the lessee

8. 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

9. 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 land and buildings

10. 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

11. Alpine Ltd signed an 8-year non-cancellable lease with Mt Buller Ltd for the use of high-tech equipment. 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. $604 190

C. $504 838

D. $596 112

12. On 1 January 2022 Dobel Ltd signed a 10-year non-cancellable lease that requires a payment of $100 000 at the end of each year. 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

13. Where a lease involves a dealer or manufacturer, lease rentals representing a recovery of material service costs are to be treated by the lessor as:

A. expenses of the financial years in which the related costs are incurred

B. expenses of the year in which costs are recovered

C. revenue of the financial years in which the related costs are incurred

D. revenue of the year in which the related costs are recovered

14. Under an operating lease, 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

15.

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 2022?

A. 13 539

B. 15 335

C. 15 243

D. 11 835

16. According to paragraph 1 of AASB 16, the objective of the standard is: ‘to ensure that _______________ provide relevant information in a manner that faithfully represents those transactions. This information gives a basis for users of financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of an entity.’

A. lessees and lessors

B. lessees

C. lessors

D. contracts

17. In terms of scope, the accounting standard does not apply to all leases. Specifically, paragraphs 3 and 4 of AASB 16 state: ‘An entity shall apply this Standard to all leases, including leases of right-of-use assets in a sublease,’ except for which among the following?

A. leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources

B. leases of biological assets within the scope of AASB 141 Agriculture held by a lessee

C. service concession arrangements within the scope of Interpretation 12 Service Concession Arrangements

D. All of the given options are correct.

18. According to AASB 16, the underlying asset is an asset that is the subject of a lease, for which the right to use that asset has been provided by:

A. a lessor to a lessee

B. a manufacturer to a lessor

C. government

D. None of the given answers are correct.

19. A substantive right to substitute the asset would be deemed to exist if which of the following conditions is satisfied?

A. the supplier has the practical ability to substitute the asset

B. the supplier can benefit from substituting the asset

C. the supplier has the practical ability to substitute the asset and can benefit from substituting the asset

D. None of the given answers are correct.

20. According to AASB 16, at the commencement date, a lessee shall recognise:

A. right-of-use asset and a lease liability

B. right-of-use asset only

C. lease liability only

D. None of the given answers are correct.

21. According to AASB 16, the date on which a lessor makes an underlying asset available for use by a lessee is known as the:

A. commencement date

B. closing date

C. ownership date

D. None of the given answers are correct.

22. The general principal is that service contracts are not to be capitalised on the balance sheet because contracts often contain which of the following?

A. lease component only

B. service component only

C. both a lease and a service component

D. None of the given answers are correct.

23. AASB 16 requires that the lease component of the contract must be considered separately from which of the following?

A. service contract

B. purchase contract

C. loan agreement

D. plant contract

24. When recognising a lease liability we are required to calculate which of the following values of the unavoidable lease payments to be made over the ‘lease term’?

A. historic value

B. present value

C. future value

D. None of the given answers are correct.

25. ‘Lease term’ is defined within AASB 16 as: ‘The non-cancellable period for which a lessee has the right to use an underlying asset’, together with which of the following?

A. periods covered by an option to extend the lease if the lessee is reasonably certain not to exercise that option and periods covered by an option to terminate the lease if the lessee is reasonably certain to exercise that option

B. periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option minus periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option

C. periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option

D. None of the given answers are correct.

26. A restriction included in a debt agreement limiting the amount of debt an entity may have relative to its total assets is known as a:

A. debt-to-asset constraint

B. technical default

C. debt default

D. None of the given answers are correct.

27. Which among the following is a leverage indicator?

A. Debt ÷ Earnings before Interest, Income Taxes, Depreciation and Amortisation (EBITDA)

B. Debt ÷ Earnings before Taxes

C. Debt ÷ Gross Revenue

D. None of the given answers are correct.

28. AASB 16 defines a lease as: ‘A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.’ Which of the following parties to a contract does this definition apply to?

A. customer only

B. supplier only

C. both to the customer and to the supplier

D. None of the given answers are correct.

29. Considerations of whether something is ‘reasonably certain’ would include a number of factors, including: whether a _____________ exists within the lease contract and whether the nature of the pricing of the options is sufficiently favourable to the lessee to suggest that the lessee is reasonably certain to exercise the option.

A. purchase option

B. lease-renewal option

C. purchase option or lease-renewal option

D. debt convenant

30. El Gazaar argued that the introduction of the new accounting standard requiring the capitalisation of finance leases had which of the following cash-flow implications for firms?

A. positive

B. negative

C. positive or negative

D. neutral

31. Are a lease liability and a right-of-use asset required to be recognised by a lessee at lease inception for all leases?

______________________________________________________________________________

32. Discuss the objective of AASB 16.

______________________________________________________________________________

33. Discuss when to recognise a lease.

______________________________________________________________________________

34. Define commencement date as defined in Appendix A of AASB 16.

______________________________________________________________________________

35. Should a ‘service arrangement’ be included as part of a lease? Discuss.

______________________________________________________________________________

36. Discuss briefly why service contracts are not to be capitalised on the balance sheet.

______________________________________________________________________________

37. How is ‘lease term’ defined within AASB 16?

______________________________________________________________________________

38. Discuss the factors for considering whether something is ‘reasonably certain’ (in relation to renewal or bargain purchase option).

______________________________________________________________________________

39. What is meant by technical default?

______________________________________________________________________________

40. What is meant by debt-to-asset constraint?

______________________________________________________________________________

Chapter 11 Testbank