Topic 4 - Accounting for Leases

Question 1

Define the term lease.

Answer 1

• a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration

Question 2

Define the term underlying asset.

Answer 2

• an asset that is the subject of a lease, for which a right to use that asset has been conveyed to a lessee

(this must be a SPECIFIC asset)

Question 3

Define the term lessor.

Answer 3

• an entity that enters into a contract to provide the right to use an underlying asset for a period in exchange for consideration

Question 4

Define the term lessee.

Answer 4

• an entity that enters into a contract to obtain the right to use an underlying asset for a period of time in exchange for consideration

Question 5

Define the term lease “commencement date”.

Answer 5

• the date on which the lessor makes the underlying asset available to the lessee

Question 6

Define the term lease term.

Answer 6

• the non-cancellable period for which the lessee has the right to use the underlying asset:

· PLUS any extension options IF the lessee is reasonably certain to exercise the option

· MINUS any early termination options IF the lessee is reasonably certain to exercise the option

Question 7

When must the leases of assets and liabilities be recognised and where?

Answer 7

Question 8

Define the term lease liability.

Answer 8

• the present value of all unpaid unavoidable lease payments that will be made by the lessee during the lease term

Question 9

The lease asset (“right-of-use-asset”) is the total of:

-

-

-

-

Answer 9

• the recorded lease liability, PLUS
• all lease payments made at/before the commencement date, PLUS
• all initial indirect costs incurred by the lessee, PLUS

(all costs that are ONLY incurred due to the lease)

• all costs incurred for dismantling/removing/returning the underlying asset (usually estimated)

Question 10

The following items are unavoidable lease payments unless they are paid on (or before) the commencement date:

1.

2.

3.

4.

5.

Answer 10

Question 11

The discounting of unavoidable lease payments use:

1.

2.

Answer 11

1. The interest rate implicit in the lease, OR (if this rate is not identifiable)
2. The incremental borrowing rate of the lessee

Question 12

What is the exemption for a lease that exists for the lessee?

Answer 12

Question 13

If an exemption exists, how may the lessee recognise the lease payments?

Answer 13

• recognise the lease payments as expenses
• may choose to apply the normal capitalisation rules and recognise the lease payments on the balance sheet

Question 14

How does the lessee recognise the payment of interest during the lease period?

Answer 14

Question 15

How does the lessee recognise the (re-)payment of the principal (lease liability reduction)?

Answer 15

• recognised as the difference between total lease payment (excluding reimbursement of costs to the lessor) MINUS interest expense for the period:

REMEMBER!!

• the payment made by the lessee may include reimbursement of costs incurred by the lessor, this component is NOT part of the actual lease payment

Question 16

Write the journal entry for how a lessee would recognise the commencement of a finance lease.

Answer 16

Question 17

Write the journal entry for how a lessee would recognise the annual lease payment including interest.

Answer 17

Question 18

How are assets depreciated by the lessee?

Answer 18

Question 19

Write the journal entry for how a lessee records depreciation of a leased asset.

Answer 19

Question 20

Differentiate between the carrying value of the asset and the lease liability for the lessee.

Answer 20

Question 21

The exemption for leases allows lessees to avoid the capitalisation of lease assets/liabilities, and to treat lease payments as expenses if:

• the lease is for a period of 12 months or less
• the lease is for a “low value” item

Write the journal entry for how a lessee would recognise the exemption of lease payments as expenses in each period.

Answer 21

Question 22

How does a lessor distinguish between an operating and a finance lease?

Answer 22

Question 23

For a lessor, a finance leases requires:

-

-

-

Answer 23

• the replacement of the underlying lease asset with a lease receivable
• the recognition of the residual asset (if any exists)
• the recognition of profit/loss on the lease (if any exists)

Question 24

What is the main consideration indicating the existence of a finance/operating lease?

Answer 24

Question 25

What are the *other* 3 considerations **indicating** the existence of a finance/operating lease?

Answer 25

Question 26

The **lease receivable** of the lessor is calculated in the same way as the lessees' **lease liability**:

Answer 26

Question 27

Finance leases from a lessor's perspective could be classified as a **direct finance lease**. *Define* this term.

Answer 27

Question 28

Finance leases from a lessor's perspective could be classified as a **manufacturer or retailer lease**. *Define* this term.

Answer 28

Question 29

The *valuation* of a **lease receivable** is recognised in the statement of financial position of the lessor. What is a lease receivable *equal* to?

Answer 29

Question 30

For **direct finance** leases, how is the amount of **interest** received with each payment *calculated*?

Answer 30

(**manufacturer/retailer** lease is the *same*)

Question 31

For **direct finance** leases, how is the amount by which the lease receivable is **reduced** with each payment *calculated*?

Answer 31

(**manufacturer/retailer** lease is the *same*)

Question 32

Write the journal entry for how to record: - the *purchase* of an **asset** that will be *leased* * -* the recognition of lease **contract** - the recognition of lease **payment**

Answer 32

Question 33

What is included in the **sales transaction** of a manufacturer/retailer lease?

Answer 33

Question 34

The **lease receivable** for a manufacturer/retailer lease is *equal* to: - -

Answer 34

Question 35

Write the journal entries for a **manufacturer/retailer** lease for: 1. **Sale** of the asset from the entity to itself and inception of the lease 2. Recognition of **lease payment**

Answer 35

Question 36

How are assets that are leased out under **operating** leases *recognised*? How is the **depreciation** calculated and recognised?

Question 37

Write the journal entry for the recognition of ongoing lease payments of an **operating** lease.

Answer 37

Question 38

What are the rules regarding a **lessor** leasing a **building/land**? What about the rules for the **lessee**?