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CIMA F1 > Leases > Flashcards

Leases Flashcards

1
Q

Define Lease

A

A contract which conveys
- right to use an identified asset
- for period of time
- in exchange for consideration

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2
Q

What is Lessee and Lessor

A

Lessee: An entity that obtains the right to use an underlying asset for a period of time in exchange for consideration
Lessor: An entity that provides the right to use and underlying asset for a period of time in exchange for consideration

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3
Q

Which conditions does contract contain a lease

A
  1. Right to control ( economic benefits of using asset)
  2. Identified asset
  3. Period of time (specified in contract can be time or usage)
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4
Q

What is meant by the lease term:?

A
  • Non cancellable perood whereby lessee can use asset
  • Includes- option to extend the lease if option is viable
  • Includes- option to terminate lease is option is viable
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5
Q

Does the lessee legally own an asset which has been loaned

A

NO - only the economic gain in the period of time specified

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6
Q

What factor is most likely to influence lease term?

A

Useful life of an asset

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7
Q

Which definitions of the conceptual framework is used for lessee accouting

A

Asset - lessee gains use of asset

Liabilities- present obligation to transfer economic resource in exchange

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8
Q

What does lessee recognise at commencement date of a lease and how is it accounted for

A

Debit: Right of use asset
Credit: Lease liability

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9
Q

How is lease liability split up

A

Current Lease payment &
Present value of lease payments

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10
Q

What does lease payments incldue

A
  • fixed payments
  • variable lease payments dependent on rate
  • amount expected to be
  • price of purchase option to extend
  • price of terminating lease early
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10
Q

What is the discount factor used in the calculation of present value

A

Interest rate implicit in the lease
- Present value does not include non refundable deposits or prepayed installment

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10
Q

Why might subsequent measurements of lease be different?

A
  • Lessees will incur interest on outstanding lease liability
  • Lessee will be making payments
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11
Q

What are the two methods by which lease liability can be paid

A

In arrears

In Advance

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11
Q

What are the entries for the reduction of lease liability through installments made?

A

DEBIT: Lease liability
CREDIT: Cash

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11
Q

What are the journal entries for increasing interest rate on lease liability

A

DEBIT: finance costs(SPL)
CREDIT: lease liability

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11
Q

What is PVOFLP

A

Present Value Of Future Lease Payments

12
Q

What is meant by in arrears lease payments

A

PVOFLP + Finance cost (interest rate*pvoflp) -
Installment 1
=
Total Liability Carried Down

+ Finance cost (interest % x balance 2)
- Installment 2
= Non current liability

12
Q

How is current liability worked out when lease libaility is payed in arrears?

A

Current Liability = Lease Liabiility Carried down - Non current Liability

12
Q

How to calculate/ what is meant by lease liability payments in advance?

A

PVOFLP + Finance costs ( Interest % x PVOFLP)
= Liability Carried down

  • Installment 2
    = Non Current Liability
13
Q

When is installment 1 paid in lease advance payemnts

A

Paid on lease commencement date so not included in the PVOFLP

14
Q

How do you work out current liability when lease payments are in advace?

A

Current Liability = Liability Carried Down - Non currrent liability

15
Q

What is non current liability when lease payments are made in advance?

A

Non current liability = installment amount

16
Q

How is initial measurement of right of use asset measure

A
  • At cost
17
Q

What does the cost of right of use asset entail?

A

Initial measurement of lease liability (PVOFLP)
+ Lease payments before commencement
+ Initial cost inccured
+ dismantling costs
- Lease incentives recieved

18
Q

How is subsequent right of use asset cost measured

A
  • At Cost - using IAS 16 model for PPE
  • Unless revalued- revaluation model applies

-otherwise accumulated depreciation and impairment still applies

19
Q

How is right of use asset depreciated?

A
  • From the lease commencement date to either
  • end of it’s useful life
    OR
  • end of lease term

WHICHEVER IS EARLIER

20
Q

What are the journal entries when right of use of asset comes to an end to account for depreciation charges?

A

Debit : depreciation expense

Credit: Accumulated depreciation (offset against cost of right of use asset)

21
Q

When is depreciation always charged to the end of the right of use asset’s useful life?

A

When ownership of the right of use asset is expected under terms of leases

22
Q

What are the two exemptions for leases

A
  • Short term lease (12 months or less)
  • Low underlying asset value (subjective)
23
Q

If exemption is recognised for an asset, how does an entitiy record this asset?

A

As an expense
- straight line basis
- over lease term

24
Q

What disclosures are required by a lesse in reporting

A
  • Depreciation charge for right of use assets
  • Interest rate on lease liabilities
  • Total cash flow of leases
  • assitions to right of use assets
  • carrying amount of right of use assets
  • expense for short term/low value lease exemption assets
25
Q

If the lease trerm was 10 months and one month is free. How do you account for this

A

Entity will still spread out the cost of the asset over 10 months
- multiple payment by number of months paid
- divide by number of months in lease term

26
Q

What costss are included in the total amount charged regarding a lease

A
  • Finance cost of that year
    -Installment cost
  • Depreciation of right of use assets
27
Q

How to work out total comprehensive income from equity table

A

Profits = Retained earning current - retained earning bought forward + dividends

Profits + reval surplus = total comp incom

CIMA F1 (14 decks)

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