Chapter 21 - Leases

Question 1

Lease payments - Operating Leases

Answer 1

Under operating leases, lease payments should be recognised as an expense is the SOPL on a straight line basis over the lease term

Question 2

Recognizing a finance lease at inception

Answer 2

Net Investment in lease

The lessor should recognize assets under a finance lease in its balance sheet as a receivable at an amount equal to the net investment in the lease

Question 3

Finance lease - treatment of the excess in sale value over the carrying amount of an asset

Answer 3

Sale below fair value resulting in profit&raquo_space;> recognise the profit immediately

Sale below fair value resulting in loss and loss is compensated by future lease payments&raquo_space;> Defer and amortise

Sale above fair value&raquo_space;> excess over fair value should be deferred and amortized

Question 4

Finance Lease - recognition in the statement of financial position

Answer 4

Finance Leases should be recorded as an asset and a liability at the lower of the fair value and the present value of minimum lease payments

Question 5

Finance Lease

Answer 5

A portion of lease payments is treated as interest in the books of the lessee

The lessee claims depreciation

Question 6

Finance Lease Criteria

Answer 6

> Ownership of the asset is transferred at the end of the lease

> lessee has the option to purchase the asset at a price lower than fair value

> Lease term covers major part of the asset’s economic life

> the present value of the minimum lease payments equals the fair value of the leased asset

> Specialised nature of the asset means only the lessee can use the asset

> The lessee can cancel the contract, but will bear the lessor’s losses related to the cancellation

> Lessee can continue to lease the asset for a secondary period at a lower rate

> Gains or losses from fluctuations of the residual value fall to the lessee

Question 7

Operating Lease

Answer 7

Any lease that cant be classified as a finance lease

Question 8

Accounting treatment by Lessor - Finance Lease

Answer 8

Lessor does not classify items as owned assets in FS

Question 9

Accounting treatment by Lessor - Finance Lease

Answer 9

Lessor recognizes the Finance Lease as a lease receivable

Question 10

Accounting treatment by Lessor - Finance Lease Income

Answer 10

Finance income is the difference between total lease payments receives and the net carrying value of the leased asset

Question 11

Accounting treatment by Lessor - Operating Lease

Answer 11

Lessor classifies assets as owned assets in the FS

Question 12

Accounting treatment by Lessee - Finance Lease

Answer 12

As the lessee is buying the asset on a loan from the lessor, the transaction results in an asset and a liability in the FS of the lessee

Question 13

Accounting treatment by Lessee - Finance Lease

Answer 13

Lessee directly expenses any lease payments made

Question 14

Accounting treatment by Lessee - Finance Lease

Answer 14

Lessee recognizes incentives as a reduction onnthe lease rental

Question 15

Leasor - Finance Lease

Answer 15

Recorded as a Finance Lease Receivable in the FS

Question 16

Leasor - Finance Lease payments received

Answer 16

Capital portion is allocated to reduce the receivable

Interest portion is recognized as Finance Income

Question 17

Lessee - Finance Lease

Answer 17

Recorded as an assey and a liability in the FS

Question 18

Leasor - Finance Lease depreciation

Answer 18

Same and consistent as owned assets

Question 19

Leasor - Finance Lease payments received

Answer 19

Allocated between finance charge and the reduction of outstanding liability

Question 20

Leasor - Operating Lease Assets

Answer 20

Recognizes the assets held for Operating leases in the FS

Question 21

Leasor - Operating Lease Income

Answer 21

Lease income is recognized over the lease term on a straight line basis

Question 22

Leasor - Operating Lease Incentives

Answer 22

Incentives for Operating leases are recognized as reductions on rental income of the lease term

Question 23

Lessee - Operating Lease Payments

Answer 23

Lease payments are recorded as an expense in the IS on a straight line basis

Question 24

Lessee - Operating Lease Incentives

Answer 24

Recognized as reductions on rental expense over the lease term

Question 25

Operating Lease - Disclosure

Answer 25

> describe the entity’s lease arrangements

> recognising the lease payments as expenses

Question 26

Finance Lease - Disclosure

Answer 26

> lease liability, divided between its current and non-current portion

Current portion = capital portion likely to be paid within the next 12 months

> reconciliation of the future minimum lease payments and the present value of the finance lease