Lessor Accounting

Question 1

Indicators of finance lease

Answer 1

A. There is a transfer ownership of the underlying asset to the lessee at the end of the lease term.
B. The lessee has an option to purchase the underlying asset. (Reasonably certain)
C. Lease term is the MAJOR PART of the economic useful life of the asset (75%of the economic life)
D. PV of the lease payments amount to is at least SUBSTANTIALLY all of the FV of the leased asset. (90% of the FV of the leased asset).

Question 2

Inception date

Answer 2

• date when a lease is classified as finance or operating lease.

• date earlier either
-lease of contract/agreement
-commitment by the parties to the principal provision of the lease.

Question 3

Commencement date

Answer 3

•date the lessee is entitled to exercise the right to use asset
•date of initial recognition

Question 4

How does the lessor recognize lease payment in operating lease model?

Answer 4

As income on straight line basis over the lease term or another systematic basis.

Question 5

Accounting treatment for executory cost?

Answer 5

Expense immediately

Question 6

Accounting treatment for initial direct cost?

Answer 6

Capitalized as part of the leased assets cost and recognized as an expense over the lease term.

Question 7

Accounting treatment for leases bonus received?

Answer 7

Initially recognized as unearned lease income and is amortized over the lease term.

Question 8

Accounting treatment for security deposits?

Answer 8

Accounted as liability if refundable upon expiration of the lease.

Question 9

Initial measurement of finance lease in the lessor accounting?

Answer 9

Receivable measured at the amount equal to the NET INVESTMENT in the lease.

Question 10

In computing the discount rate of net investment, what rate should be used?

Answer 10

Interest implicit rate

Question 11

Subsequent measurement of finance lease in the lessor accounting?

Answer 11

Receivable or net investment measured similarly to an amortized cost financial asset using effective interest method.

Question 12

Lessor in the ff:
A. Direct finance lease
B. Sales type lease

Answer 12

A. Companies engaged in financing business
B. Manufacturer or dealer

Question 13

Income generated from the lease in the ff:
A. Direct lease
B. Sales type lease

Answer 13

A. Interest income
B. Gross profit and interest income

Question 14

Composition of gross investment in the lease

Answer 14

1. Annual rentals
2. Guarantee residual value
3. Unguarantee residual value
4. Purchase option
5. Termination penalty

Question 15

Composition of net investment in the lease (direct finance lease)

Answer 15

1. Cost or CA of the leased asset
2. Intial direct cost

If the above is not available;
1. Annual rentals
2. Guarantee residual value
3. Unguarantee residual value
4. Purchase option
5. Termination

Question 16

Compoof net investment in the lease (sales type lease)

Answer 16

1. Annual rentals
2. Guarantee residual value
3. Unguarantee residual value
4. Purchase option
5. Termination

Question 17

Treatment of initial direct cost in the ff:
A. Direct lease
B. Sales type lease

Answer 17

A. Included in the measurement of the net investment
B. Expense immediately. Form part of COGS