Preliminary Examination

Question 1

What is the cost of a right-of-use asset acquired in a finance lease?

a. The absolute sum of the lease payments over the lease term
b. The present value of the lease payments, including initial direct costs and lease incentives
c. The present value of the lease payments exclusive of executory costs, discounted at an appropriate rate
d. The present value of the market value of the asset, discounted at an appropriate rate

Answer 1

c. The present value of the lease payments exclusive of executory costs, discounted at an appropriate rate

Question 2

Which is not included in lease payments?

a. Any payment required by a purchase option that is reasonably certain to be exercised
b. Lease incentives given to the lessee by the lessor
c. Required payments over the lease term
d. Amount guaranteed by a party related to the lessee

Answer 2

b. Lease incentives given to the lessee by the lessor

Question 3

Which is not part of the lease payments?

a. The rental payments called for by the lease
b. Any residual value guarantee of the lessee
c. Any residual value at the end of the lease term
d. Any payment the lessee must make to purchase the underlying asset under a purchase option that is reasonably certain to be exercised

Answer 3

c. Any residual value at the end of the lease term

Question 4

Under IFRS, a lessee is required to recognize:

a. Right-of-use asset but not lease liability
b. Lease liability but not right-of-use asset
c. Right-of-use asset and lease liability
d. Neither right-of-use asset nor lease liability

Answer 4

c. Right-of-use asset and lease liability

Question 5

The lease payments include all of the following, except:

a. Estimated cost of dismantling, removing, or restoring the underlying asset for which the lessee has a present obligation
b. Fixed and variable lease payments
c. Exercise price of a purchase option that is reasonably certain to be exercised
d. Residual value guarantee of the lessee

Answer 5

a. Estimated cost of dismantling, removing, or restoring the underlying asset for which the lessee has a present obligation

Question 6

Lease payments under an OPERATING LEASE shall be recognized as an expense by the lessee on:

a. Straight line basis over the lease term
b. Accrual basis
c. Sum of units basis
d. Cash basis

Answer 6

a. Straight line basis over the lease term

Question 7

The classification of a lease as either an operating or finance lease is based on:

a. The length of the lease
b. The transfer of the risks and rewards of ownership
c. The lease payments being at least 50% of fair value
d. The economic life of the underlying asset.

Answer 7

b. The transfer of the risks and rewards of ownership

Question 8

All of the following situations would prima facie lead the lessee to account for the lease as a finance lease, except:

a. Transfer of ownership to the lessee
b. Option to purchase at a value higher than the fair value of the underlying asset
c. The lease term is for a major part of the asset’s life
d. The present value of the lease payments is substantially all of the asset

Answer 8

b. Option to purchase at a value higher than the fair value of the underlying asset

Question 9

The accounting concept that is principally used to classify leases into operating and finance on the part of the lessor is:

a. Substance over form
b. Prudence
c. Neutrality
d. Completeness

Answer 9

a. Substance over form

Question 10

If the residual value of an underlying asset is less than the amount guaranteed by the lessee:

a. The lessor pays the lessee for the difference
b. The lessee recognizes a gain at the end of the lease term
c. The lessee has no obligation related to the residual value
d. The lessee pays the lessor for the difference

Answer 10

d. The lessee pays the lessor for the difference

Question 11

The cost of the right-of-use asset comprises all of the following, except:

a. The fair value of lease payments
b. Advance payments made to the lessor on or before the commencement date
c. Initial direct costs incurred by the lessee
d. Estimated cost of dismantling, removing, or restoring the underlying asset for which the lessee has a present obligation

Answer 11

a. The fair value of lease payments

Question 12

A lessee with a lease containing a purchase option that is reasonably certain to be exercised should depreciate the right-of-use asset over:

a. Useful life of the asset
b. Lease term
c. Useful life of the asset or the lease term, whichever is shorter
d. Useful life of the asset or the lease term, whichever is longer

Answer 12

a. Useful life of the asset

Question 13

The right-of-use asset is reported as:

a. Current as a separate line item
b. Noncurrent as a separate line item
c. Intangible asset
d. Investment property

Answer 13

b. Noncurrent as a separate line item

Question 14

The lessee may apply the operating lease model under what condition?

a. Short-term lease
b. Low-value lease
c. Both short-term lease and low-value lease
d. Under all circumstances

Answer 14

c. Both short-term lease and low-value lease

Question 15

Under US GAAP, which statement is incorrect regarding the lease capitalization criteria?

a. The lease transfers ownership to the lessor
b. The lease contains a purchase option
c. The lease term is equal to at least 75% of the economic life of the underlying asset
d. The lease payments are at least 90% of the fair value of the asset

Answer 15

b. The lease contains a purchase option

Question 16

In computing depreciation of a right-of-use asset under a lease, the lessee should deduct:

a. The residual value guarantee and depreciate over the lease term
b. An unguaranteed residual value and depreciate over the lease term
c. The residual value guarantee and depreciate over the useful life of the asset
d. An unguaranteed residual value and depreciate over the useful life of the asset

Answer 16

a. The residual value guarantee and depreciate over the lease term

Question 17

Which of the following statements concerning residual value guarantee is appropriate for the lessee?

a. The asset and related liability should be increased by the absolute amount of the residual value
b. The asset and related liability should be decreased by the absolute amount of the residual value
c. The asset and related liability should be decreased by the present value of the residual value
d. The asset and related liability should be increased by the present value of the residual value

Answer 17

d. The asset and related liability should be increased by the present value of the residual value

Question 18

A ten-year finance lease entered into on January 1 of the current year specified equal annual lease payments due on December 31 of each year. The first annual lease payment paid on December 31 of the current year consists of which of the following?

a. Interest expense
b. Lease liability
c. Both interest expense and lease liability
d. Neither interest expense nor lease liability

Answer 18

c. Both interest expense and lease liability

Question 19

Lease liability is measured at:

a. The absolute amount of lease payments
b. The present value of lease payments
c. The present value of fixed lease payments
d. The fair value of the underlying asset

Answer 19

b. The present value of lease payments