leases

Question 1

when does a contrct contain a lease

Answer 1

when it conveys the right to use an asset for a periof time, in exchange for a consideration

Question 2

I/Y of a lease calculation

Answer 2

implicit interest rate
incremental borrowing rate if implicit rate cannot be determined

Question 3

how do we determine implicit interest rate

Answer 3

FV =guarenteed risidual value
PMT= normal lease payments
PV= fair value of asset + initial direct costs to the lessor
N= lease term

comp I/Y

Question 3

what is contingent rent and how do we account for it

Answer 3

it is lease payment that depends on uncertain future events
exclude from lease payment amount

it is expensed regardless of the type of lease

expensed in p/l in period which condition occurs

Question 4

N (Components of lease term)

Answer 4

contract period
+ option to renew (exercise of option is certain)
+ option to terminate (exercise of option is not certain)

Question 5

depreciation period of a leased asset

Answer 5

purchase option uncertain
shortest of
useful life
or
lease term

ownership transfers at the end of the lease term or purchase option will be exercised
- useful life

Question 6

FV (future value ) in implicit interest rate calculation

Answer 6

guaranteed + unguaranteed residual value

Question 7

name recognition exemptions for lessees

Answer 7

i.e lessee can choose not to recognise assets and liabilities for the following

-short term leases ( less than 12 months)
-leases of low value assets

Question 8

what happens if one of the two recognition options is elected

Answer 8

treat asset as an operating lease

Question 9

treatment of lease incentives (lessee , operating lease)

Answer 9

net off against lease payments

included in lease term when determining equalised lease payments

Question 10

treatment of lease payments ( lessee, operating lease)

Answer 10

recognised as expense in p/l on straight line basis over lease term

i.e

total payment x current year /lease term

Question 11

what if cash flows are not equal. equalised lease payment not equal to cash lease payment

Answer 11

cash paid more than equalised expense
= prepaid expense (SOFP)

cash paid less than equalised cost
= accrued expense (SOFP)

Question 12

journal entries for a low value asset

Answer 12

dr lease expense (low value asset)
@ equalised amount
cr bank
@actual amount for the year
dr/cr receivable or payable
–balancing figure