F4 - Accounting for Leases

Question 1

Recognition of a gain resulting from a sale in a sale-leaseback should be:

Answer 1

Deferred when the seller -lessee retains the right to substantially all of the remaining use of the property (as in a capital lease).

Question 2

When should a lessor recognize in income a nonrefundable lease bonus paid by a lessee on signing an operating lease?

Answer 2

Over the life of the lease. It represents income attributable to the lease term. Recognition should be deferred and recognized over the life of the lease.

Question 3

The U.S. GAAP lease term criterion is that the lease term be greater than or equal to _____% of the economic life of the leased asset.

Answer 3

75

Question 4

The excess of the present value of the selling price over its cost is recorded as:

Answer 4

Profit

Question 5

When a lease is capitalized because of transfer of title or bargain purchase, depreciation is based on:

Answer 5

The life of the asset, not the lease. The cost includes the bargain purchase price. Depreciation cannot be taken below the salvage value.

Question 6

When recording rent expense, a bonus to obtain the lease should be:

Answer 6

Allocated over the life of the lease.

Question 7

Leasehold improvements should be amortized over:

Answer 7

The lesser of the remaining life of the lease, or the life of the improvement.

Question 8

In “major” sale-leasebacks, all gain is:

Answer 8

Deferred.

Question 9

With a capital lease, what type of revenue is recognized?

Answer 9

Interest revenue (NOT rental revenue).

Question 10

If any one of the following conditions is met, a lease is considered a CAPITAL LEASE under U.S. GAAP and is treated as if owned by the lessee:

Answer 10

1. The lease transfers ownership to the lessee by the end of the term.
2. The lease contains a bargain purchase option.
3. The PV at the beg of the lease term of the “minimum lease payments” equals or exceeds 90% of the fair value of the leased property.
4. The lease term is 75% or more of the estimated economic life of the leased property.

Question 11

Rule: Any profit on a sale-leaseback which is classified as a capital (finance) lease should be

Answer 11

deferred and amortized in proportion to depreciation taken on the leased-back asset.

Question 12

The capital (finance) lease will be recorded by debiting leased asset and crediting capital lease obligation (minimum lease payment x annuity factor). The interest expense in the first year will be calculated by

Answer 12

multiplying the interest rate times the capital (finance) lease obligation

Question 13

If the present value of the minimum lease payments amounts to 88% of the fair value of the asset, the lease would be classified as ____________under U.S. GAAP and would most likely be classified as ______________under IFRS.

Answer 13

operating lease

finance lease

Under IFRS, a lease is classified as a finance lease if the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset. An argument could be made that 88% is “at least substantially all of the fair value of the asset.

Question 14

When the lease is an IFRS sale-leaseback transaction is classified as a finance lease, AND/OR the seller-lessee accounts for the lease as an Operating Lease and the sales price is above fair value, all profit is:

Answer 14

Deferred and amortized over the lease term.

Question 15

Under a noncancellable lease with a transfer of title, the lessee will:

Answer 15

Record BOTH depreciation and interest expense. The Lessor will record interest income.

Question 16

What are the components of the lease receivable for a lessor involved in a direct-financing lease?

Answer 16

The minimum lease payments PLUS any residual value.