Question

1. When a lessee is accounting for a capital (finance) lease

a) a guaranteed residual value is excluded from the “minimum lease payments.”

b) an unguaranteed residual value is excluded from the “minimum lease payments.”

c) a guaranteed residual value is basically an additional lease payment due at the end of the lease.

d) the present value of any guaranteed residual is deducted from the leased asset cost in determining the depreciable amount.

2. In calculating depreciation of a leased asset, the lessee should subtract a(n)

a) guaranteed residual value and depreciate over the term of the lease.

b) unguaranteed residual value and depreciate over the term of the lease.

c) guaranteed residual value and depreciate over the economic life of the asset.

d) unguaranteed residual value and depreciate over the economic life of the asset.

3. Which item is NOT included in amount of the lease payment under IFRS 16?

a) Guaranteed residual values

b) Renewal or purchase options

c) Executory costs

d) Contingent rentals

4. A lessee reported a ten-year capital lease requiring equal annual payments. The reduction of the lease liability in year 2 should equal

a) the current liability shown for the lease at the end of year 1.

b) the current liability shown for the lease at the end of year 2.

c) the reduction of the lease obligation in year 1.

d) one-tenth of the original lease liability.

5. Which statement is correct in comparing capital leases to operating leases?

a) A capital lease will have a higher asset turnover compared to an operating lease.

b) A capital lease will increase the return on total assets compared to an operating lease.

c) A capital lease will have a lower debt-to-equity ratio compared to an operating lease.

d) A capital lease will have a higher debt-to-equity ratio compared to an operating lease.

Answer 1

c) a guaranteed residual value is basically an additional lease payment due at the end of the lease.

The capital requires a renter to book assets and liabilities associated with the lease if the rental contract meets specific requirements. In essence, a capital lease is considered a purchase of an asset, while an operating lease is handled as a true lease under generally accepted accounting principles (GAAP).

a) guaranteed residual value and depreciate over the term of the lease.

A capital lease is a lease in which the lessee records the underlying asset as though it owns the asset. This means that the lessor is treated as a party that happens to be financing an asset that the lessee owns.

• The lease period covers at least 75% of the useful life of the asset; or

• There is an option to buy the leased asset following the lease expiration at a below-market rate; or

• Ownership of the leased asset shifts to the lessee following the lease expiration; or

• The present value of the minimum lease payments totals at least 90% of the fair value of the asset at the beginning of the lease.

The lessor and lessee typically agree upon lease conditions in advance that will designate a lease as an operating lease or capital lease; the outcome of the lease analysis is rarely accidental.

c) Executory costs

These are the costs which are related to the owing of asset by realizing taxes and expenses. These also referred to extra or additional rent which is substituted with the monthly lease payments which is directly paid to lessee. This is not recorded in the IFRS 16 for the lease payments.