Lease

Question 1

Variable lease payments not included in the lease liability are treated as cash outflows from operations and will therefore have a negative impact on bottom-line cash flow from operations.

Answer 1

a finance lease (it meets the “W” criteria in “OWNES

Question 2

Operating lease

Answer 2

If there is no transfer of ownership at the end of the lease and no other information about the lease is given, the lease will be treated as an operating lease by the lessee

If there is no written purchase option that the lessee is reasonably certain to exercise and no other information about the lease is given, the lease will be treated as an operating lease by the lessee.

If the lease term is not equal to 75% or more of the economic life of the asset, the lease will be treated as operating by the lesse

Question 3

finance lease criteria

Answer 3

Ownership transfers at the end of the lease
Written purchase option the lessee is reasonably certain to exercise

PV of minimum lease payments = Fair value of asset (approximately 90% of FV of leased property)
Lease term = Major part (75%) of asset useful life
Asset is specialized such that it has no alternative use to the lessor

Question 4

The lessee calculates lease payments at commencement of the lease based on the present value of the following items:
fixed payments, variable payments, exercise price of purchase option, termination penalties, and the probable amount owed of the guaranteed residual.

Question 5

The bond investments are classified as trading securities because the bonds are held for the purpose of selling them in the near term. Trading securities are reported at fair value on the balance sheet