CLASS 7 Leasing (IFRS 16)

MCQs
1. On 1 January 20X6 Fellini hired a machine under a four year lease. A deposit of $700,000 was payable on the
commencement of the lease on 1 January 20X6. . The present value of the future lease payments was
$1,871,100. The further 3 instalments of $700,000 are payable annually in advance. The interest rate implicit
in the lease is 6%.
What amount will appear under non-current liabilities in respect of this lease in the statement of financial
position of Fellini at 31 December 20X7? (Answers to nearest $`000).
A. $700,000
B. $742,000
C. $1,283,000
D. $1,872,000

Solution:
$
st
Lease liability at 1 January 20X6
Interest
Lease liability at 31st December 20X6

Total liability at 31st December 20X6

Current Non-current

31 Dec 20X6 31 Dec 20X7

the part of the the part of the

liability that will be liability that will be
paid in the next paid in more than a
reporting period year

If we have payment in advance, current liability will equal payment

If we have payment an arrears, current liability will equal payment less interest next year
 2. Which of the following situation does NOT suggest that an arrangement constitutes a lease under IFRS 16?
A. The lessee obtains substantially all of the economic benefits from use of the asset.
B. Ownership in the asset is transferred at the end of the lease term.
C. The contract relates to an identified asset.
D. If it suits them to do so, the lessor can substitute an identical asset.

3. A company acquired an item of plant under a lease on 1 April 20X7. The present value of the future lease
payments and the carrying amount of the right-of-use asset was $15,462,000 million and the rentals are $6
million per annum paid in arrears on 31 March each year. The useful life of the plant is deemed to be five
years. The is no option to buy the asset at the end of the lease term.
The interest rate implicit in the lease is 8% per annum.
What is the total charge to profit or loss in respect of this lease at 31 March 20X8?
A. $1,236,900
B. $4,329,300
C. $6,000,000
D. $6,390,900

Right-of-use asset
Lease liability

Solution:
Right of use asset Lease liability
Cost at 1st April Initial liability

4. At what amount does IFRS 16 Leases require a lessee to measure a right-of-use asset acquired under a
lease?
A. Lease liability + other direct cost + incentives received
B. Lease liability + other direct cost - prepayments
C. Lease liability + other direct cost + prepayments - incentives received
D. Lease liability - other direct cost - prepayments + incentives received

5. On 1 October 20X3, Fresco acquired an item of plant under a five-year lease agreement. The lease required
an immediate deposit of $2 million with five payments of $6 million paid annually in arrears commencing on
30 September 20X4. The present value of the future lease payments was $22,746,000. The agreement had
an implicit finance cost of 10% per annum.
What will be the current liability in Fresco’s statement of financial position as at 30 September 20X4?
A $1,902,060
B $4,097,940
C $6,000,000
D $2,274,600
Solution:
$
Lease liability at 1st October 20X3
Interest
Less payment in arrears
Lease liability at 30th September 20X4

OTQs
6. The objective of IFRS 16 Leases is to prescribe the appropriate accounting treatment and required
disclosures in relation to leases. Which TWO of the following are among the criteria set out in IFRS 16 for
an arrangement to be classified as a lease?
The lessee has the right to substantially all of the economic benefits from use of the asset
The lease term is for substantially all of the economic life of the asset
The agreement concerns an identified asset which cannot be substituted
The lessor has the right to direct the use of the asset

7. Cornet Co has entered into an eight-year lease agreement on 1 July 20X4. The lease requires annual
payments of $750,000 in arrears. The present value of the lease payments at 1 July 20X4, discounted at the
rate of 6% is $4,657,500. Additionally, Cornet Co paid directly attributable costs of $37,500 on 1 July 20X4.
Select the total charge to the statement of profit or loss for the year ended 30 June 20X5 in respect of the
right-of-use asset using the options in the pull down list.

Pull down list

$586,875
$866,325
$279,450
$1,029,450

Solution:
Right of use asset Lease liability
st
Cost at 1 July Initial liability
 8. A sale and leaseback transaction involves the sale of an asset the leasing back of the same asset. If the
arrangement meets the IFRS 15 criteria to be recognized as a sale, how should any ‘profit’ on the sale be
treated?

Recognise whole amount of profit immediately in profit or loss

Defer profit and amortise over the lease
Recognise proportion relating to right of use retained
Recognise proportion relating to right of use transferred

9. During the year ended 30 September 20X4 Hyper Co entered in the following transactions:
On 1 October 20X3 Hyper Co acquired under a lease to obtain a right-of-use asset which was initially
measured at $340,000. Under the terms of lease, payment in advance of $90,000 was made on
commencement of the lease being the first of five equal annual payments. The right of use asset has a five-
year useful life. The lease has an implicit interest rate of 10%.
On 1 August 20X4 Hyper Co made a payment of $18,000 for a nine-month lease of an item of excavation
equipment. Hyper wished to utilise the exceptions available under IFRS 16 Leases.
What amount in total would be charged to Hyper`s statement of profit or loss for the year ended 30
September 20X4 in respect of the above transactions?

Solution:
$

Total charge to P&L

10. On 1 January 20X6 Platimun entered into a lease agreement. The initial lease liability was $360,000 and the
deposit of $120,000 was payable on 1 January 20X6 with three further instalments of $100,000 payable on
31 December 20X6, 31 December 20X7 and 31 December 20X8. The rate of interest implicit in the lease is
12%.
What will be the amount of the finance charge arising from this lease which will be charged to profit or loss
for the year ended 31 December 20X7?

Solution:
$
Initial liability
 Problem: Lease or Buy (to solve in mini groups )

Net Ltd started trading on 1 January 2016 with share capital of £157,500.
The company needed a machine from 1 January 2016, costing £112,500. This machine has a useful economic
life of 10 years with zero residual value. If the company leased the machine, annual rental would be £19,900
over 10 years, payable in arrears starting on 31 December 2016.
The company earns gross revenues of £40,500 and incurs operating costs before rental charges and
depreciation of £14,960 in 2016.
The rate implicit in the lease agreement is 12%.
Required
Calculate the statement of comprehensive income for the year ended 31 December 2016 and the statement of
financial position as at 31 December 2016 for Net Ltd if it:
(i) buys the machine;
(ii) leases the machine

Solution:
Statement of comprehensive income £ £
Buy Lease
Revenue

Net profit
Statement of financial position
Non-current assets
Current assets
Total assets
Share capital
Profit
Non-current liabilities under lease
Current liabilities under lease
Total capital, reserves and liabilities

Assessment progress test (Class 7)  10 min

https://edu.hse.ru/mod/quiz/view.php?id=258875
 SELF-STUDY (Leasing) - 1

Bulwell Aggregates entered into a three-year contract to obtain three lorries on 1 January 20X1The contract met
the IFRS 16 criteria to be classified as a lease and the initial measurement of the right-of-use asset was $54,000.
The agreement states that Bulwell Aggregates will pay a deposit of $9,000 on 1 January 20X1, and two annual
instalments of $24,000 on 31 December 20X1, 20X2 and a final instalment of $20,391 on 31 December 20X3.
Ownership will pass to Bulwell at the end of the lease term.

Interest is to be calculated at 25% on the balance outstanding on 1 January each year and paid on 31 December
each year.

The depreciation policy of Bulwell Aggregates Co is to depreciate the right-of-use asset arising from the lease of the
vehicles over a four year period using the straight line method.

Required
Show the entries in the statement of profit or loss and statement of financial position for the years 20X1, 20X2,
20X3. This is the only lease transaction undertaken by this company.
Calculations to the nearest $.

SELF-STUDY (Leasing) - 2

On 1 January 20X3 Lis entered into lease agreement to rent an asset for a six-year period, at which point it will be
returned to the lessor and scrapped, with annual payments of $18,420 made in advance. The initial measurement
of the lease liability amounts to $84,000, discounted at the implicit interest rate shown in the lease agreement of
12.5%.
Lis expected to sell goods produced by the asset during the first five years of the lease term, but has leased the
asset for six years as this is the requirement of the lessor, and in case this expectation changes. Lis has the right to
determine the use of the asset during the lease term and will obtain substantially all the economic benefit from its
use.
Required
Explain how the above lease would be accounted for the year ending 31 December 20X3 including producing
relevant extracts from the statement of profit or loss and statement of financial position.
You are not required to prepare the notes to the financial statements.