Chapter 8 - Leases

Question 1

Finance lease

Answer 1

A lease that transfers substantially for the risks and rewards of ownership of an asset to the lessee

Question 2

To be considered a finance lease, what would the term of the lease and the present value of total rentals paid be?

Answer 2

The term of the lease would be close to the total useful life of the asset and the present value of total rental is paid would be close to the value of the asset.

Question 3

Which type of lease is capitalised in the lessee’s accounts?

Answer 3

Finance lease

Question 4

Which type of leases are not capitalised?

Answer 4

Operating leases

Question 5

An operating lease

Answer 5

A lease other than a finance lease.

Question 6

Leases of land on normally classified as what type of lease?

Answer 6

Operating leases. Land normally has and indefinite economic life.

Question 7

If a lease covers the life of the building which type of lease is it classified as?

Answer 7

A finance lease. Buildings can be treated separately to land even if the contract entered into is a joint one to lease land and buildings. If the lease covers the Life of the building, then it can be classified as a finance lease even if the land element is classified as an operating lease.

Question 8

What are the two critical questions to be answered when accounting finance leases?

Answer 8

1) at what value should be as it capitalised?

2) what finance charge should be made in the statement of profit or loss?

Question 9

Minimum lease payments

Answer 9

The payments over the lease term that the lessee is required to make.

Question 10

Interest rate implicit in the lease

Answer 10

This will approximate to the rate of interest on a loan to purchase the asset. Implicit means the rate of interest is not specifically quoted.

Question 11

At the start of the lease, the sun to be recorded both as an asset and liability should be the lower of?

Answer 11

The fair value of the leased asset or, if lower, the present value of the minimum lease payments, derived by discounting them at the interest rate implicit in the lease

Question 12

Finance charge

Answer 12

The excess of the minimum lease payments over the initial capitalised value represents the finance charge. The total finance charge should be allocated to accounting periods during the lease term.

Question 13

The treatment of operating leases in the lessees books

Answer 13

The rental expenses should be charged on a straight line basis over the lease term to the statement of profit or loss. The asset is not recognised in the lessee’s books.

Question 14

Which international accounting standard distinguishes between finance lease and an operating lease?

Answer 14

IAS 17 Leases