Financial Accounting Test 2 MCQ

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The University of Western Australia *

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Accounting

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May 10, 2024

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Financial Accounting Test 2 MCQ 1) Both lessors and lessees need to determine whether a lease is a finance lease or an operating lease. False – Only the lessor needs to determine whether operating or financing as the lessor can leave off operating leases from balance sheet while the lessee under the new standard must recognise all leases on balance sheet regardless of operating or finance hence not needing to determine either or. 2) The lease standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. True – from the notes: The core principle of the new accounting standard is that an entity shall recognize assets and liabilities arising from a lease ‘to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions’AASB 16 requires assets and liabilities to be recognized by the lessee for all leases of more than 12 months, with the asset being of the nature of a ‘right-of-use asset’ that provides a right to use the lease’s asset for the term of the lease, and the liability would be for lease payments that are economically unavoidable over the lease term 3) Unless the exceptions apply, lessees need to recognise a right-of-use asset and lease liability in their accounting records. True - How to account for leases under AASB 16 (cont.) When to recognize a lease? At the commencement date, a lessee shall recognize a right-of-use asset and a lease liability. *Not sure however if there are exceptions or not, may influence whether T or F* 4) The lessee is not allowed to capitalise their initial direct costs to the ‘right-of-use asset’ account, they need to expense such costs. False - IFRS 16 includes a single accounting model for all leases by lessees. The main implications of the new standard on current practice for lessees include: All leases (subject to the exceptions described below) will be capitalised on the balance sheet by recognising a ‘right-of-use’ asset and a lease liability for the present value of the obligation. *However not sure about the initial direct costs maybe these are expensed initially* https://www.bdo.com.au/en-au/content/accounting-news/accounting-news-february- 2016/new-leases-standard 5) Lessees need to amortise the right-of-use asset over the asset’s full useful life, even if the lease period is shorter. False - from the notes it says: each period we would also need to amortise the leased asset (or else it will stay in the accounts indefinitely) The general principle is that the leased asset shall be amortised over the life of the lease if the lessee is not going to retain the asset at the end of the lease term. If the lessee is expected to retain the leased asset at the end of the lease term (perhaps by way of making an additional payment) then the leased asset shall be amortised over its expected useful life. *As it says in general it’s over the life of the lease, I’ve put false*

6) Lessees need to recognise the interest and capital portion of their lease payments; the capital portion reduces the lease liability True – From my own understanding and reading the capital portion of the lease signifies the repayment of the principal amount owed for the right use the asset. Interest is obviously the cost of borrowing and thus both do need to be recognised. The capital portion will also reduce the lease liability as it is paying down the principal amount. 7) If a lessee pays $120 000 per year to the lessor, including $20 000 for maintenance, then the $20 000 is treated as an expense by the lessee and is not included in the computation of the lease liability and right-of-use asset. True – from the notes: Service cost component: Contracts for the use of an asset often also include associated services (a service agreement). For example, a customer might sign a contract to lease a car and the contract could include a requirement that the lessee pay a specific ongoing amount to have the car maintained and serviced by a particular service provider. The service cost component is not treated as part of the ‘lease’ and therefore is not capitalised as part of the lease liability or lease asset. 8) If the exceptions apply, and the lessee pays $100 per month for 11 months, the journal entry each month is: Dr Lease expense $100, Cr Cash at Bank $100. True – from the notes: 9) If a lessor has an operating lease, then they will remove the asset from their accounting records as the significant risks and rewards of ownership have moved from the lessor to the lessee. False - “ the statement significant risks and rewards of ownership have moved from the lessor to the lessee” occurs when there is a finance lease not when there is an operating lease. 10) If the lessor is a financier lessor and decides the lease is a finance lease, they will remove the asset from their accounting records and replace it with another asset, ‘Lease receivable’, which is essentially a debit loan. True - In the case of finance leases, the lessor derecognises the leased asset from its statement of financial position. Instead, it recognises a lease receivable equivalent to the net investment in the lease. Following this, the lessor recognises interest income on this receivable, with the lease payments made by the lessee reducing the outstanding balance. https://ifrscommunity.com/knowledge-base/ifrs-16-lessor-accounting/

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