8 - Leases Pt. 2

Question 1

Lessor classifies each of its leases as either

Answer 1

Finance lease or Operating lease

Question 2

Transfers substantially all the risks and rewards incidental to ownership of underlying asset

Answer 2

Finance lease

Question 3

Finance lease is also called

Answer 3

Capital lease

Question 4

Lease does not transfer substantially all the risks and rewards incidental to ownership of underlying asset

Answer 4

Operating lease

Question 5

Include the possibilities of losses from idle capacity or technological obsolescence because of changing economic conditions

Answer 5

Risks

Question 6

Represented by expectation of profitable operation over asset’s economic life and gain from appreciation in value

Answer 6

Rewards

Question 7

Indicators of a finance lease (5):

Answer 7

1. transfer of ownership
2. bargain purchase option (BPO)
3. lease term is at least 75% of the useful life of the leased asset
4. PV of lease payments is at least 90% of the fair value of the leased asset @ inception date
5. leased asset is of specialized nature

Question 8

Does not provide specific guidance in determining what constitutes a “major part”

Answer 8

PFRS 16

Question 9

Under FAS and SFAS No. 13 of US GAAP, lease term at least ___ constitutes a major part of the economic life of the asset

Answer 9

at least 75%

Question 10

Either:
1. Period which asset is expected to be economically usable
2. Number of production expected to be obtained from the asset by one or more users.

Answer 10

Economic life

Question 11

Other indicators of finance lease (3):

Answer 11

a. transfer of risk
b. transfer of risks & rewards
c. transfer of reward

Question 12

Lease classifications are made at?

Answer 12

inception date

Question 13

Is the earlier of date of lease agreement and date of commitment by the parties

Answer 13

Inception date

Question 14

Date where lessor makes and underlying asset available for use by a lessee

Answer 14

Commencement date

Question 15

Date of initial recognition for the lease

Answer 15

Commencement date

Question 16

Lessor recognizes a financial lease as _____ measured at amount equal to _____ in the lease

Answer 16

receivable; net investment

Question 17

Lessor transfers all risks & rewards to lessee and derecognizes the leased asset and recognizes ___

Answer 17

Finance lease receivable

Question 18

Treated as repayment of principal and finance income

Answer 18

Finance lease receivable

Question 19

Sum of lease payments receivable by lessor under finance lease and any unguaranteed residual value

Answer 19

Gross investment in the lease

Question 20

Gross investment in the lease discounted @ interest rate implicit in the lease

Answer 20

Net investment in the lease

Question 21

Difference between gross investment in the lease & net investment in the lease

Answer 21

Unearned interest income

Question 22

Net investment is measured using

Answer 22

interest rate implicit in the lease

Question 23

Net lease receivable is subsequently measured

Answer 23

@ amortized cost similar to financial asset

Question 24

Lessor does not recognize depreciation because the leased asset is

Answer 24

already derecognized

Question 25

Incremental costs of obtaining a lease that would not have been incurred if lease had not been obtained (except for costs incurred by a manufacturer/dealer)

Answer 25

Initial direct costs

Question 26

Includes commission, legal fees, internal costs and excludes general overheads

Answer 26

Initial direct costs

Question 27

Rate of interest that causes the present value of lease payments & unguaranteed residual value = sum of fair value of underlying asset & initial direct costs

Answer 27

Interest rate implicit in the lease

Question 28

Initial direct costs are ____ except direct costs incurred by a manufacturer/dealer

Answer 28

capitalized

Question 29

Classification of finance lease by the lessor:

Answer 29

1. Direct financing lease
2. Sales type lease

Question 30

Lessor acquires assets and leases them with intention of generating income through interest

Answer 30

Direct financing lease

Question 31

Lessor is neither the manufacturer or dealer

Answer 31

Direct financing lease

Question 32

Lessor is the manufacturer or dealer and uses leasing as means of marketing its products; lessor often provides customers a choice of buying or leasing an asset

Answer 32

Sales type lease

Question 33

Sales type is accounted for like direct financing except it recognizes the following: (3)

Answer 33

1. Sales revenue
2. Cost of sales
3. Gross profit

Question 34

Lower of present value of lease payments discounted using a market rate and fair value of the asset

Answer 34

Sales revenue

Question 35

Equal to cost or underlying asset less present value of unguaranteed residual value

Answer 35

Cost of sale

Question 36

Difference between revenue and cost of sale

Answer 36

Gross profit

Question 37

Costs incurred in obtaining a sales type lease are recognized as _____ and are excluded from initial direct costs and measurement of net investment

Answer 37

expense

Question 38

What does lessor account for residual value?

Answer 38

Both guaranteed and unguaranteed residual values

Question 39

If residual value is guaranteed, present value of guaranteed res. val. is

Answer 39

added to sales

Question 40

If residual value is unguaranteed, present value of unguaranteed res. val. is

Answer 40

deducted from cost of sales