Question 1

A journal entry is not required for either the lessor or lessee when an operating lease is initiated unless there is an advance payment,such as a lease bonus or prepayment of rent in addition to the periodic rents.

Accepted Answer

When an operating lease is initiated, both the lessor and lessee are required to make journal entries to record the lease agreement, even if there are no advance payments. The lessee records lease expense over the lease term, and the lessor records rental income.

Question 2

The same lease may be classified differently by the lessor as compared to the classification used by the lessee.

Accepted Answer

This is because lessors and lessees have different perspectives and objectives in classifying leases. The lessor may classify a lease as a finance lease while the lessee may classify the same lease as an operating lease, depending on their respective accounting standards and requirements.

Question 3

While only certain leases are currently accounted for as a sale or purchase,there is theoretical justification for considering all leases to be sales or purchases.The principle reason that supports this idea is that:

Accepted Answer

A lease can be seen as a transaction involving the transfer of a quantifiable right to use the property for a specified period of time. This right can be measured in terms of the time period and the rent paid. Therefore, leases can be considered as sales or purchases because they involve a transfer of economic benefits and control of the asset for a period of time.

Question 4

All four finance lease criteria must be met in order for a lease to be deemed a finance lease.

Accepted Answer

Only one of the finance lease criteria needs to be met for a lease to be classified as a finance lease.

Question 5

Assume the following facts relating to a lease: Leased asset,new at inception of lease term.
Estimated useful life,14 years.
Lease term,8 years; asset returns to lessor.
Interest rate implicit in the lease,10 percent (known by lessee).
Lessee's marginal borrowing rate,12 percent.
Amount of each lease payment,$2,000.
Lessor's cost of the leased asset,$15,164.
Market value of leased asset at inception of the lease term,$15,164
Lease payments are due at the end of each period.
From the perspective of the lessee,this lease should be classified as a(n):

Accepted Answer

The answer of Assume the following facts relating to a...

Question 6

Under proposed changes to IFRS leasing standards,a lease that is less than 12 months in duration may be classified as long-term if there are substantial penalties for non-renewal.

Accepted Answer

Under IFRS leasing standards, a lease that is less than 12 months in duration with no purchase option is considered a short-term lease, regardless of penalties for non-renewal. The classification as short-term or long-term is based on the lease term and options, not penalties.

Question 7

The recorded values of the asset(s)and corresponding liability at the inception of a finance lease (from the point of view of the lessee)will always be the same under ASPE and IFRS.

Accepted Answer

Under ASPE, the recorded values may be different if the lease agreement does not transfer substantially all the risks and rewards of ownership to the lessee, while under IFRS, the recorded values will be the same regardless of the transfer of risks and rewards.

Question 8

On January 1,2014,WXY signed an operating lease agreement,which required $5,800 annual rentals to be paid at the end of each year.The accounting period ends December 31.At the end of 2014,WXY (lessee)should make the following entry:

Accepted Answer

The answer of On January 1,2014,WXY signed an operating lease...

Question 9

The term usually used to describe the situation where a lessee has an option to purchase the leased property at a price that is sufficiently lower than its fair market value so that the exercise of the option appears reasonably assured is:

Accepted Answer

The term "bargain purchase option" is commonly used to describe this situation where the option to purchase the leased property is at a significantly reduced price, making it reasonably assured that the lessee will exercise the option. The other options listed are not typically used to describe this specific scenario.

Question 10

Sale and Leaseback arrangements may be finance or operating leases.

Accepted Answer

Sale and Leaseback arrangements can involve either finance leases or operating leases, depending on the specific terms and conditions of the agreement.

Question 11

In an operating lease,if a non-refundable down payment is made in advance,the lessor should initially debit Cash and credit Unearned Rent (liability).

Accepted Answer

When a non-refundable down payment is made in advance in an operating lease, the lessor initially debits Cash and credits Unearned Rent (liability) to record the receipt of the payment as a liability for future rental income.

Question 12

Non-refundable payments made in advance on operating leases may be amortized either over the term of the lease,or any other period consistent with the GAAP guidelines for amortizing intangible assets.

Accepted Answer

The answer of Non-refundable payments made in advance on operating...

Question 13

Under proposed changes to IFRS leasing standards,leases will generally be classified as short-term or long-term.The finance and operating lease classifications will disappear.

Accepted Answer

The statement is correct. Under the proposed changes to IFRS leasing standards, leases will be classified as either short-term or long-term, and the finance and operating lease classifications will be eliminated.

Question 14

What is the cost basis of an asset acquired by a lease,which is in substance an instalment purchase?

Accepted Answer

According to IAS 17 (Leases), in substance, an instalment purchase occurs when the lease agreement effectively transfers all the risks and rewards of ownership to the lessee. In such cases, the lessee should recognize the leased asset and the lease liability at the beginning of the lease term at the present value of the future minimum lease payments, which excludes any executory costs and any profit thereon. Therefore, the cost basis of an asset acquired by a lease that is, in substance, an instalment purchase is the present value of the future minimum lease payments under the lease (exclusive of executory costs and any profit thereon) discounted at an appropriate rate.

Question 15

The straight-line method is frequently used to amortize non-refundable rental payments made in advance on leased assets because:

Accepted Answer

The straight-line method is less complex compared to the interest method, therefore, less costly to use. It is a practical method for amortizing non-refundable rental payments made in advance on leased assets. Although the interest method may be more theoretically sound, it may result in unreliable amounts being recognized as expense, making straight-line method a more reliable and practical choice. IFRS does not require any specific method to be used for amortizing non-refundable rental payments in advance.

Question 16

Under a sales-type lease,the lessor recognizes a dealer's or manufacturer's profit on the date of inception of the lease.

Accepted Answer

This is because in a sales-type lease, the lessor is effectively selling the leased asset to the lessee and therefore recognizes the profit at the beginning of the lease.

Question 17

Each periodic rent collected on a finance lease by the lessor is usually part principal and part interest revenue.

Accepted Answer

This is true, as each periodic rent payment on a finance lease includes both a portion of the principal being repaid by the lessee and a portion of interest revenue earned by the lessor.

Question 18

The treatment of gains and losses under Sale and Leaseback arrangements are identical under ASPE and IFRS.

Accepted Answer

Under ASPE (Accounting Standards for Private Enterprises in Canada), gains and losses on sale and leaseback transactions are generally recognized immediately. In contrast, under IFRS (International Financial Reporting Standards), the treatment depends on the type of leaseback. If it's a finance lease, any gain is deferred and amortized over the lease term. If it's an operating lease, and the sale is at fair value, gains and losses are recognized immediately; otherwise, gains are deferred and recognized over the lease term. This results in different treatments under the two standards.

Question 19

Finance revenue is recognized on a finance lease because the leased asset is considered sold at the inception of the lease,and the lease is a way of financing the lease.

Accepted Answer

Finance revenue is recognized on a finance lease because the lessor has essentially sold the asset to the lessee at the beginning of the lease and is providing financing for that purchase. As a result, revenue is recognized over the term of the lease as interest income.

Question 20

The appropriate valuation of an operating lease on the balance sheet of a lessee is:

Accepted Answer

Under operating lease accounting, the lease is not capitalized on the balance sheet, so it is recorded as zero unless there is a prepayment.

Quiz 7: Financial Assets: Cash and Receivables