FAR Leases Exercises PDF

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Manila * Cavite * Laguna * Cebu * Cagayan De Oro * DavaoFAR OCAMPO/OCAMPOFAR-Leases OCTOBER 2021DISCUSSION PROBLEMS What is a ‘lease’ in accordance with PFRS 16? a. A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for c...

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Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao Since 1977

FAR FAR.3128-Leases

OCAMPO/OCAMPO OCTOBER 2021

DISCUSSION PROBLEMS 1. What is a ‘lease’ in accordance with PFRS 16? a. A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration. b. An agreement between two or more parties that creates enforceable rights and obligations. c. A contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. d. An agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time. 2. Which statement is incorrect regarding a contract that contains a lease and non-lease components? a. A lessor shall allocate the consideration in the contract applying PFRS 15. b. A lessee shall allocate the consideration in the contract to each lease component on the basis of the relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components. c. As a practical expedient, a lessee may elect, by class of underlying asset, not to separate nonlease components from lease components, and instead account for each lease component and any associated non-lease components as a single lease component. d. A lessee may apply the practical expedient to embedded derivatives that meet the criteria in paragraph 4.3.3 of PFRS 9. 3. Which statement is incorrect regarding identification of lease? a. At inception of a contract, an entity shall assess whether the contract is, or contains, a lease. b. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. c. The underlying asset can be identified explicitly or implicitly. d. An entity shall reassess whether a contract is, or contains, a lease at the end of each reporting period. 4. A customer does not have the right to use an identified asset in which of the following? a. If the supplier has the substantive right to substitute the asset throughout the period of use. b. If the supplier has a right or an obligation to substitute the asset only on or after either a particular date or the occurrence of a specified event. c. If the supplier has a right or obligation to substitute the asset for repairs and maintenance, if the asset is not operating properly or if a technical upgrade becomes available. d. In all of these.

5. A supplier’s right to substitute an asset is substantive only if which of the following conditions exist: a. The supplier has the practical ability to substitute alternative assets throughout the period of use. b. The supplier would benefit economically from the exercise of its right to substitute the asset. c. Both a and b. d. Neither a nor b. 6. Lease term is the non-cancellable period for which a lessee has the right to use an underlying asset, together with: a. Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option. b. Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option. c. Both a and b. d. Neither a nor b. 7. Which statement is incorrect regarding the determination of the lease term and the assessment of the non-cancellable period of a lease? a. An entity shall apply the definition of a contract and determine the period for which the contract is enforceable. b. A lease is no longer enforceable when the lessee and the lessor each has the right to terminate the lease without permission from the other party with no more than an insignificant penalty. c. If only a lessee has the right to terminate a lease, that right is considered to be an option to terminate the lease available to the lessee that an entity considers when determining the lease term. d. If only a lessor has the right to terminate a lease, the non-cancellable period of the lease excludes the period covered by the option to terminate the lease. 8. Which of the following will likely require reassessment of the lease term after the commencement date? I. Significant leasehold improvements not anticipated at the commencement date that are expected to have significant economic benefit for the lessee when the option to extend or terminate the lease, , becomes exercisable. II. A significant modification to, or customization of, the underlying asset that was not anticipated at the commencement date. III. The inception of a sublease of the underlying asset for a period beyond the end of the previously determined lease term. IV. A business decision of the lessee that is directly relevant to exercising, or not exercising, an option (for example, a decision to extend the lease of a complementary asset, to dispose of an alternative asset or to dispose of a business unit within which the right-of-use asset is employed). a. b.

I, II, III and IV I, II and III only

c. d.

I and II only I and III only

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FAR.3128

EXCEL PROFESSIONAL SERVICES, INC. 9. The lease term begins a. At the inception date. b. At the commencement date. c. Earlier of a and b. d. Later of a and b. 10. The commencement date is a. The date of the lease agreement. b. The date of commitment by the parties to the principal terms and conditions of the lease. c. The date on which a lessor makes an underlying asset available for use by a lessee. d. Earlier of a and b. 11. At commencement date, a lessee shall recognize a right-of-use asset and a lease liability. Why? a. Because at the start of a lease a lessee obtains the right to use an asset for a period of time and, if payments are made over time, incurs a liability to make lease payments. b. Because the absence of information about leases on the balance sheet meant that investors and analysts were not able to properly compare companies that borrow to buy assets with those that lease assets, without making adjustments. c. Both a and b. d. Neither a nor b. 12. At the commencement date, a lessee shall measure the right-of-use asset at a. Cost b. Fair value c. The lower cost and fair value d. The lower of the fair value of the asset and the present value of the minimum lease payments 13. The cost of the right-of-use asset shall comprise: I. The amount of the initial measurement of the lease liability II. Any lease payments made at or before the commencement date, less any lease incentives received III. Any initial direct costs incurred by the lessee IV. An estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease, unless those costs are incurred to produce inventories a. b.

I, II, III and IV I, II and III only

c. d.

I and II only I and III only

14. Which statement is incorrect regarding measurement of right-of-use assets after the commencement date? a. A lessee shall measure the right-of-use asset applying a cost model, unless it is required or chooses to apply other measurement models. b. If a lessee applies the fair value model in PAS 40 to its investment property, the lessee shall also apply that fair value model to right-of-use assets that meet the definition of investment property in PAS 40. c. If right-of-use assets relate to a class of property, plant and equipment to which the lessee applies the revaluation model in PAS 16, the lessee shall also apply that revaluation model to all of the right-of-use assets that relate to that class of property, plant and equipment. d. None of these.

15. Which statement is incorrect regarding depreciation of right-of-use asset? a. The depreciation policy for right-of-use asset held should be consistent with that for owned assets. b. The lessee shall depreciate the right-of-use asset from the commencement date. c. If the lease transfers ownership of the underlying asset to the lessee by the end of the lease term or if the cost of the right-of-use asset reflects that the lessee will exercise a purchase option, the lessee shall depreciate the right-of-use asset to the end of the useful life of the underlying asset. d. If the lease does not transfer ownership of the underlying asset to the lessee by the end of the lease term or if the cost of the right-of-use asset reflects that the lessee will not exercise a purchase option, the lessee shall depreciate the right-of-use asset to the later of the end of the useful life of the right-of-use asset or the end of the lease term. 16. The Layla Company leased a canning machine with a fair value of P165,000. The present value of the lease payments discounted at the rate implicit in the lease is P158,400. The initial direct costs incurred in negotiating the lease were P1,250. The asset has a useful life of 5 years and the lease is for a period of 4 years, after which the asset can be acquired for a near zero cost, which is substantially below the expected value of the asset at that date. If the asset is depreciated on a straight-line basis, what amount should be the annual depreciation expense? a. P39,912 c. P31,930 b. P39,600 d. P31,680 17. Which statement is incorrect regarding presentation of right-of-use assets? a. A lessee shall either present in the statement of financial position, or disclose in the notes right-ofuse assets separately from other assets. b. If a lessee does not present right-of-use assets separately in the statement of financial position, the lessee shall disclose which line items in the statement of financial position include those rightof-use assets. c. Right-of-use assets that meet the definition of investment property shall be presented in the statement of financial position as investment property. d. None of these. 18. At the commencement date, the lease payments included in the measurement of the lease liability comprise the following payments for the right to use the underlying asset during the lease term that are not paid at the commencement date: I. Fixed payments (including in-substance fixed payments), less any lease incentives receivable II. Variable lease payments that depend on an index or a rate, initially measured as at the commencement date III. Amounts expected to be payable by the lessee under residual value guarantees IV. The exercise price of a purchase option if the lessee is reasonably certain to exercise that option V. Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease a. I, II, III, IV and V b. I, II, III and IV only c. I, III and IV only d. I and III only

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FAR.3128

EXCEL PROFESSIONAL SERVICES, INC. 19. The lease payments shall be discounted using a. The interest rate implicit in the lease, if that rate can be readily determined. b. The lessee’s incremental borrowing rate, if interest rate implicit in the lease cannot be readily determined. c. Either a or b. d. Neither a nor b. 20. What is the lessee’s incremental borrowing rate? a. The rate that exactly discounts estimated cash receipts through the expected life of the financial asset to the gross carrying amount of a financial asset. b. The rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial asset to the amortized cost of a financial asset that is a purchased or originated credit-impaired financial asset. c. The rate of interest that causes the present value of the lease payments and the unguaranteed residual value to equal the sum of the fair value of the underlying asset and any initial direct costs of the lessor. d. The rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. 21. On December 31, 2019, Gord Co. leased a machine from Valir, Inc. for its entire economic life of five years. Equal annual payments under the lease are P525,000 (including P25,000 annual executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2019, and the second payment was made on December 31, 2020. The interest rate implicit in the lease is 10%. Gord learned that a third party guaranteed to pay Valir, Inc. a residual value of P200,000 at the end of the lease term. In its December 31, 2020 statement of financial position, Gord should report in the non-current liability section a lease liability of a. P1,243,445 c. P867,790 b. P1,018,047 d. P788,900 22. Miya Corp. has leased an item of plant under the following terms: • Commencement of the lease - January 1, 2019 • Term of the lease - 5 years • Annual payments in advance - P12,000 • Cash price and fair value of the asset – P52,000 • Implicit interest rate – 8% per annum • Depreciation policy – 20% per annum The total lease related expenses for the fiscal year ended September 30, 2020 is a. P13,072 c. P12,272 b. P12,896 d. P10,200

Payment

Interest (8%)

24. Which of the following will require remeasurement of the lease liability? I. Change in the lease term II. Change in the assessment of an option to purchase the underlying asset III. Change in the amounts expected to be payable under a residual value guarantee IV. Change in future lease payments resulting from a change in an index or a rate used to determine those payments a. b.

I, II, III and IV I, II and III only

c. I and II only d. I and III only

25. A lessee shall remeasure the lease liability by discounting the revised lease payments using an unchanged discount rate for which of the following? a. Change in the lease term b. Change in the assessment of an option to purchase the underlying asset c. Change in the amounts expected to be payable under a residual value guarantee d. Change in future lease payments resulting from a change in floating interest rates

Use the following information for the next three questions. A lessee entered into a lease contract for the lease of land for 10 years. The contract provides for annual lease payments of P10,000 payable at the end of each year with fixed annual escalation of 2% up to Year 5. At the beginning of Year 6, a rent review will be done and lease payments will be reset to reflect market including the subsequent escalation rates, if any. The lessee’s incremental borrowing rate is 8%. Assume that after the rent review, the agreed rate for Year 6 is P12,000 with annual increase of 1% thereafter. 26. At commencement date, the lessee should recognize a lease liability of a. P41,429 c. P70,842 b. P68,603 d. P72,558 27. After the rent review, the lessee should recognize an adjustment to lease liability of a. Nil c. P5,589 b. P3,065 d. P8,879

SOLUTION GUIDE:

Date

23. Which statement is incorrect regarding reassessment of the lease liability? a. After the commencement date, a lessee shall remeasure the lease liability to reflect changes to the lease payments. b. A lessee shall recognize the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. c. If the carrying amount of the right-of-use asset is reduced to zero and there is a further reduction in the measurement of the lease liability, a lessee shall recognize any remaining amount of the remeasurement in retained earnings. d. None of these.

Principal

1/1/19

C.A. 52,000

1/1/19

12,000

-

12,000

40,000

1/1/20

12,000

3,200

8,800

31,200

1/1/21

12,000

2,496

9,504

21,696

28. In Year 6, the lessee should recognize amortization expense of a. Nil c. P8,202 b. P7,869 d. P8,636

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FAR.3128

EXCEL PROFESSIONAL SERVICES, INC. 29. Lease modification is a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease. Examples include a. Adding or terminating the right to use one or more underlying assets b. Extending or shortening the contractual lease term c. Both a and b d. Neither a nor b 30. A lessee shall account for a lease modification as a separate lease if: a. The modification increases the scope of the lease by adding the right to use one or more underlying assets. b. The consideration for the lease increases by an amount commensurate with the stand-alone price for the increase in scope and any appropriate adjustments to that stand-alone price to reflect the circumstances of the particular contract. c. Both a and b. d. Neither a nor b. 31. For a lease modification that is not accounted for as a separate lease, at the effective date of the lease modification a lessee shall: a. Allocate the consideration in the modified contract. b. Determine the lease term of the modified lease. c. Remeasure the lease liability by discounting the revised lease payments using a revised discount rate. d. Do all of these. 32. For a lease modification that is not accounted for as a separate lease, the lessee shall account for the remeasurement of the lease liability by: a. Decreasing the carrying amount of the right-of-use asset to reflect the partial or full termination of the lease for lease modifications that decrease the scope of the lease. b. Recognizing in profit or loss any gain or loss relating to the partial or full termination of the lease. c. Making a corresponding adjustment to the right-ofuse asset for all other lease modifications. d. Doing all of these. 33. The IASB amended IFRS 16 in response to COVID 19 pandemic. It added a practical expedient to provide relief for lessees from lease modification accounting for rent concessions related to COVID-19. What is that practical expedient? a. The practical expedient allows lessees to account for all leases as operating leases as a result of COVID-19-related rent concession received. b. The practical expedient allows lessees to account for COVID-19-related rent concession received as income over the remaining lease term. c. The practical expedient requires lessees to carry out an assessment to decide whether a COVID-19related rent concession received is a lease modification or not. d. The practical expedient avoids the need for lessees to carry out an assessment to decide whether a COVID-19-related rent concession received is a lease modification or not.

34. Which statement is incorrect regarding presentation of lease liabilities? a. A lessee shall either present in the statement of financial position, or disclose in the notes lease liabilities separately from other liabilities. b. If the lessee does not present lease liabilities separately in the statement of financial position, the lessee shall disclose which line items in the statement of financial position include those liabilities. c. Both a and b. d. Neither a nor b. 35. PFRS 16 does not require a lessee to recognize right of use assets and lease liabilities for the following leases, except a. Leases of low-value assets b. Leases that, at the commencement date, has a lease term of 12 months or less c. Leases that, at the commencement date, has a lease term of 12 months or less but contains a purchase option d. Both a and b 36. Which of the following would not be considered as ‘low value’ lease of asset? a. Personal computers b. Office furniture and equipment c. Delivery vehicle d. None of these 37. Which statement is incorrect regarding accounting for a lease in which the lessee is allowed not to recognize right of use asset and lease liability? a. The lessee shall recognize the lease payments as an expense on either a straight-line basis over the lease term or another systematic basis. b. The lessee shall apply another systematic basis if that...