Chapter 13: Leases

Question 1

An agreement whereby the lessor conveys to the lessee, in return for a payment or series of payments, the right to use an asset for an agreed period of time.

Answer 1

Lease

Question 2

A lease that transfers substantially all the risks and rewards incidental to ownership of an asset.

Answer 2

Finance Lease

Question 3

A lease that does not transfer substantially all the risks and rewards incidental to ownership of an asset.

Answer 3

Operating Lease

Question 4

The classification of lease depends on:

Answer 4

Substance over Form

Question 5

Finance Lease:

Answer 5

• Lease transfers ownership.
• Lessee has the option to purchase the asset at a price SUFFICIENTLY LOWER than the FV. (GOPB)
• Lease term is for the MAJOR PART of the economic life of the asset.
• PV of the minimum lease payments amounts to at least substantially all of the FV of the leased asset.
• Leased assets have SPECIALIZED nature.
• Leased assets are not easily replaced.
• If the lessee cancels the lease, the lessor’s losses SHALL BE BORNE BY THE LESSEE.
• Gains or losses accrue to the lessee.

Question 6

When a lease includes both land and buildings elements, each element shall be classified separately as either:

Answer 6

Operating or Finance Lease

Question 7

Under the lease of land and building - Minimum lease payments are allocated based on the:

Answer 7

Relative Fair Values of the Leasehold Interests of Land and Building

Question 8

Under the lease of land and building - If the lease payments cannot be allocated reliably, the entire lease is classified as:

Answer 8

Finance Lease

Question 9

Under the lease of land and building - If both elements are operating leases, the entire lease shall be classified as an:

Answer 9

Operating Lease

Question 10

Under the lease of land and building - If the land element is immaterial, the land and building may be:

Answer 10

Treated as a single unit and classified as finance or operating lease.

Question 11

This is the earlier of the date of the lease agreement and the date of commitment by the parties to the principal provisions of the lease.

Answer 11

Inception of the Lease

Question 12

The date from which the lessee is entitled to exercise its right to use the leased asset. It is also on this date that any asset or liability resulting from the lessee is initially recognized.

Answer 12

Commencement of the Lease Term

Question 13

FINANCE LEASE BY LESSEES
At the commencement date, a lessee recognizes the asset acquired and the related lease liability at:

Answer 13

Lower of the FV of the leased property AT INCEPTION DATE and PV of the minimum lease payments at INCEPTION DATE.

Question 14

FINANCE LEASE BY LESSEES
Minimum lease payments include:

Answer 14

• Rentals
• Bargain purchase option
• Guaranteed residual value

Question 15

FINANCE LEASE BY LESSEES
A lease payment that is not fixed in amount but rather based on the future amount of a factor that changes other than with the passage of time.

Answer 15

Contingent Rent

Question 16

FINANCE LEASE BY LESSEES
The minimum lease payments are discounted using:

Answer 16

Interest rate implicit in the lease (if determinable). But if not, then use the LESSEE’S INCREMENTAL BORROWING RATE.

Question 17

FINANCE LEASE BY LESSEES
These are costs incurred in negotiating and securing leasing arrangements and are CAPITALIZED as part of the asset recognized.

Answer 17

Initial Direct Costs

Question 18

FINANCE LEASE BY LESSEES
The lease liability is SUBSEQUENTLY measured at:

Answer 18

Amortized Cost

Question 19

FINANCE LEASE BY LESSEES
Should the minimum lease payments be apportioned between the interest expense and a reduction of the outstanding liability?

Answer 19

Yessir.

Question 20

FINANCE LEASE BY LESSEES
The leased asset is accounted for by:

Answer 20

Depreciating using an existing depreciation policies.

Question 21

FINANCE LEASE BY LESSEES
But if there would be NO REASONABLE CERTAINTY THAT THE LESSEE WILL OBTAIN OWNERSHIP BY THE END OF THE LEASE TERM, the asset shall be depreciated

Question 22

FINANCE LEASE BY LESSORS
A lessor recognizes the lease payments as:

Answer 22

Receivables, at an amount equal to the net investment in the lease.

Question 23

FINANCE LEASE BY LESSORS
These are included in the initial measurement of the finance lease receivable and reduce the amount of revenue recognized over the lease term.

Answer 23

Initial Direct Costs

Question 24

FINANCE LEASE BY LESSORS
This is the discount rate that, at the INCEPTION OF THE LEASE, causes the aggregate present value of:
- Minimum lease payments
- UNGUARANTEED residual value

Answer 24

Interest Rate Implicit in the Lease

Question 25

FINANCE LEASE BY LESSORS
The lease receivable is SUBSEQUENTLY measured as:

Answer 25

Amortized Cost

Question 26

FINANCE LEASE
JE for INITIAL measurement under the BOOKS OF LESSEE:

Answer 26

Leased Assets xx
Finance Lease Payable xx

Question 27

FINANCE LEASE
JE for INITIAL measurement under the BOOKS OF LESSOR:

Answer 27

Finance Lease Rec’l xx
Accum. dep. xx
Deferred finance lease rev. xx
Asset (what you leased) xx

Question 28

FINANCE LEASE
JE for SUBSEQUENT measurement under the BOOKS OF LESSEE:

Answer 28

Interest Expense xx
Finance Lease Payable xx
Cash-MDS, Regular xx

Depreciation-Leased Ass. xx
Accum. Dep.-Leased Ass. xx

Question 29

FINANCE LEASE
JE for SUBSEQUENT measurement under the BOOKS OF LESSOR:

Answer 29

Cash-Collecting Officers xx
Def. Finance Lease Rev. xx
Interest Income xx
Finance Lease Rec’l xx

Question 30

OPERATING LEASE BY LESSEE
Lease payments are recognized as:

Answer 30

Expense, on a straight-line basis over the lease term.

Question 31

OPERATING LEASE BY LESSOR
Lease payments are recognized as:

Answer 31

Income, on a straight-line basis over the lease term.

Question 32

OPERATING LEASE BY LESSEE
Initial direct costs incurred are accounted for by:

Answer 32

Treating these as prepaid rent and recognized as expense on the same basis as the lease expense.

Question 33

OPERATING LEASE BY LESSOR
Initial direct costs incurred are accounted for by:

Answer 33

Adding these to the carrying amount of the leased asset and recognized as expenses over the lease term on the same basis as the lease income.

Question 34

OPERATING LEASE
JE for INITIAL measurement under the BOOKS OF LESSEE:

Answer 34

No entry.

Question 35

OPERATING LEASE
JE for INITIAL measurement under the BOOKS OF LESSOR:

Answer 35

Leased Asset xx
Cash-MDS, Regular xx

Question 36

OPERATING LEASE
JE for SUBSEQUENT measurement under the BOOKS OF LESSEE:

Answer 36

Rent/Lease Expense xx
Prepaid Rent xx
Cash-MDS, Regular xx

Question 37

OPERATING LEASE
JE for SUBSEQUENT measurement under the BOOKS OF LESSOR:

Answer 37

Cash-Collecting Officer xx
Rent/Lease Income xx
Other Unearned Rev. xx

Depreciation-Leased Ass. xx
Accum. Dep. - Leased Ass. xx

Question 38

FINANCE LEASE (AT INITIAL MEASUREMENT)
Lessor’s Books V.S. Lessee’s Books

Answer 38

Lessor’s Books
- The Finance Lease Receivable is stated at its original amount (gross investment)
- The Deferred Finance Lease Revenue is the difference between the Gross Investment and Net Investment.

Lessee’s Books
- The Leased Assets account is stated at the PV of lease payments (net investment).

Question 39

FINANCE LEASE (AT SUBSEQUENT MEASUREMENT)
Lessor’s Books V.S. Lessee’s Books

Answer 39

Lessor’s Books
- The Cash-Collecting Officers account represents the installment payments from the lease.
- The Deferred Finance Lease Revenue is the interest income (PV x EIR%).

Lessee’s Books
- The Interest Expense is the PV x EIR%.
- The Finance Lease Payable is the Amortization (Payments - Interest Inc/Exp).
- Lessee will only recognize depreciation because nasa kanya yung item.
- Depreciation-Leased Assets account = Net Investment (PV of Lease Payments) divided by Useful Life.

RECIPROCAL ACCOUNTS FOR BOTH BOOKS
- Cash-CO (Lessor) and Cash-MDS (Lessee)
- Interest Income (Lessor) and Interest Expense (Lessee)

Question 40

OPERATING LEASE (AT INITIAL MEASUREMENT)
Lessor’s Books V.S. Lessee’s Books

Answer 40

Lessor’s Books
- The Leased Asset is = Cost of asset + Initial direct costs.

Lessee’s Books
- No entry.

Question 41

OPERATING LEASE (AT SUBSEQUENT MEASUREMENT)
Lessor’s Books V.S. Lessee’s Books

Answer 41

Lessor’s Books
- The Cash-Collecting Officer represents the rentals.
- The Rent/Lease Income represents = Total Rentals divided by Lease Term.
- Other Unearned Revenue = Cash-CO - Rent/Lease Income

Lessee’s Books
- Rent/Lease Expense represents = Total Rentals divided by Lease Term.
- Cash-MDS, Regular represents the rentals.
- Prepaid Rent = Cash-MDS, Regular - Rent/Lease Expense

RECIPROCAL ACCOUNTS FOR BOTH BOOKS
- Cash-CO (Lessor) and Cash-MDS (Lessee)
- Rent/Lease Income (Lessor) and Rent/Lease Expense (Lessee)
- Other Unearned Revenue (Lessor) and Prepaid Rent (Lessee)