Chapter 9 - Finance Lease - Lesse

Question 1

A lease that transfers substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred.

Answer 1

Finance lease

Question 2

It is conceived as a purchase of an asset and therefoe involves the recognition of an asset and the corresponding lease liability.

Answer 2

Finance lease on the part of the lessee

Question 3

It is conceived as a trasfer of property which involves the recognition of a receivable and a revenue.

Answer 3

Financeease on the part of the lessor

Question 4

It include technological obsolescene, loss from idle capacity and variations in return because of changing economic conditions.

Answer 4

Risks

Question 5

It include expectation of profitable operation or benefit from the use of the asset, gain from appreciation in value, and gain from the eventual sale of the asset or realization of residual value.

Answer 5

Rewards

Question 6

Classification of finance lease

Answer 6

1. The lease transfers ownership ofthe leased asset to the lessee at the end of the lease term.
2. The lessee has bargain purchase option.
3. The lease term is for the major part of the economic life of the asset even if the title is not transferred.
4. The present value of the minimum lease payment amounts to substantially all of the fair value of the leased asset at the inception of the lease.

Question 7

It means that the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value of the asset at the date the option becomes exercisable, and that at the inception of the lease, it is reasonably certain that the option will be exercised.

Answer 7

Bargain purchase option

Question 8

Other criteria to classify as finance lease

Answer 8

1. The leased asset is of such specialized nature that only the lessee can use it without major modification.
2. If the lessee can cancel the lease, the lessor’s losses associated with the cancelation are borne by the lessee.
3. Gains and losses from the fluctuation in the fair value of the residual accrue to the lessee.
4. The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent.

Question 9

Transfers all of the risks and rewards of ownership of an asset and therefore shall be classified as a finance lease.

Answer 9

Noncancelable lease

Question 10

Cancelable lease classified as finance lease when:

Answer 10

1. The lease can be canceled only upon the occurence of some remote contingency.
2. The lease can be canceled only with the permission of the lessor.
3. The lessee, upon cancelation, enters into a new lease for the same or equivalent asset with the same lessor.
4. The lease can be canceled only upon payment of an additional amount or penalty of such magnitude that the lessee shall be discouraged from canceling the lease.

Question 11

It is the earlier of the date of the lease agreement and the date of commirment by the parties to the principal privisions of the lease.

Answer 11

Inception of the lease

Question 12

It is the date from which the lessee is entitled to exercise its right to use the leased asset.

Answer 12

Commencement of the lease

Question 13

It is the date of initial recognition ofthe assets, liabilities, income or expenses resulting from the lease.

Answer 13

Commencement of the lease

Question 14

Seperate measurement of the land and building elements is not required when the lessee’s interest in both land and building is classified as?

Answer 14

Investment property

Question 15

How much should the lessee record the cost of the asset And lease liability?

Answer 15

Fair value of the leased property at the inception of the lease or the present value of the minimum lease payments whichever is lower.

Question 16

What discount factor is use in calculating present value of the minimum lease payments?

Answer 16

Interest rate implicit in the lease, ifthis is practicable to determine otherwise, the lessee’s incremental borrowing rate

Question 17

The discount rate that causes the aggregate present value of the minimum lease payments and the unguaranteed residual value to equal the fair value of the leased asset and initial direct costs of the lessor.

Answer 17

Interest rate implicit in the lease

Question 18

The rate of interest that the lessee would have to pay on a similar lease, or the rate that the lessee would incur by borrowing funds to purchase the asset over a similar term and similar security.

Answer 18

Lessee’s incremental borrowing rate

Question 19

Considered to be the payments that the lessee is obliged to make or can be required to make.

Answer 19

Minimum lease payments

Question 20

Inclusions in minimum lease payments

Answer 20

1. Rental payments required during the lease term.
2. Any payments required under a bargain purchase option.
3. Any guaranteed residual value made by tge lessee or party related to the lessee inthe absence of bargain purchase option.

Question 21

Part of the residual value which is guaranteed by the lessee or by party related to the lessee, the amount of guarantee being the maximum amount tgat could in any event become payable.

Answer 21

Guaranteed residual value

Question 22

Portion of the residual value of the leased asset, the realization of which by the lessor is not assured or is guaranteed solely by a party related to the lessor.

Answer 22

Unguaranteed residual value

Question 23

Portion of the lease payment that is not fixed in amount but is based on a factor other than just the passage of time.

Answer 23

Contingent rent

Question 24

Ownership expenses such as maintenance, taxes and insurance for the leased property. It should be expensed immediately when incurred.

Answer 24

Executory costs

Question 25

Often incurred in connection with specific leasing activities as in negotiating and securing leasing arrangements.

Answer 25

Initial direct costs

Question 26

Costs identified as directly attributable to activities performed by the lessee for a finance lease are included as part of the amount recognized as an asset under the lease.

Answer 26

Initial direct costs

Question 27

Initial direct cost paid by the lessee in a finance lease is?

Answer 27

Added to the cost of the asset and not a part of the initial lease liability

Question 28

What is the cost of the asset purchased?

Answer 28

Carrying amount of the leased asset plus cash payment minus the balance of the lease liability