Risks and rewards Situations indicating the existence of a finance lease

Chapter 16 – Leases Page 218 5. The Minor Company leased a freehold building for 20 years, the useful life of the building, with effect from 1 January 20X7. At that date the fair value of the leasehold interest was CU7.5 million of which CU6.0 million was attributable to the building. Annual rentals of CU800,000 are payable in advance on 1 January. How much should Minor recognise as an operating lease expense in the year ended 31 December 20X7, according to IAS17 Leases? A Nil B CU640,000 C CU160,000 D CU800,000 6. The Musca Company took out a lease for an item of plant on 1 January 20X8 for 5 years. The company is responsible for all maintenance costs of the plant over the term of the lease. The asset has a fair value of CU14,000 and Musca will pay rentals of CU3,710 at the end of each year for 5 years. The present value of the minimum lease payments is CU13,930. Under IAS17 Leases, at what amount should the plant be recognised on 1 January 20X8? A CU18,550 B CU14,000 C Nil D CU13,930 7. The Miracle Company leased some plant and machinery for 10 years, its useful life, with effect from 1 January 20X7. At that date the fair value of the plant and machinery was CU490,000. Annual rentals of CU70,000 are payable in advance on 1 January and the interest rate implicit in the lease is 9. What is the total lease liability which Miracle should recognise in its statement of financial position at 31 December 20X7, according to IAS17 Leases? A Nil B CU464,100 C CU70,000 D CU457,800 Chapter 16 – Leases Page 219 8. The Navajo Company has leased an asset on a finance lease. The present value of the minimum lease payments is CU686,000. Its fair value is CU700,000. 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. The asset is depreciated on a straight line basis. According to IAS17 Leases, what amount should be the annual depreciation expense? A CU175,000 B CU140,000 C CU137,200 D CU171,500 9. The Junior Company leased a freehold building for 20 years with effect from 1 January 20X7. The useful life of the building is 40 years. As part of the negotiations for the lease the lessor granted Junior a rent-free period. Annual rentals of CU1.6 million are payable in advance on 1 January, commencing in 20X9. What expense should Junior recognise in profit or loss in the year ended 31 December 20X7, according to IAS17 Leases? A CU1.6 million B Nil C CU1.52 million D CU1.44 million 10. The Chemsee Company leased a canning machine with a fair value of CU165,000 for a period of 5 years under a finance lease. The initial direct costs included in negotiating the lease were CU1,250. The present value of the minimum lease payments discounted at the rate implicit in the lease is CU158,400. Under the requirements of IAS17 Leases, at what amount should the machine be recognised in Chemsees financial statements? A CU165,000 B CU159,650 C CU166,250 D CU158,400 Chapter 16 – Leases Page 220 11. The Senior Company sold an item of plant and machinery on 1 January 20X7 for CU125,000, its fair value, when its carrying amount was CU100,000. Senior leased the item back on that date for 5 years, the items remaining useful life. Lease payments are CU35,000 on 1 January each year. Which of the following statements isare true, according to IAS17 Leases? 1 The profit on disposal recognised in profit or loss on 1 January 20X7 is CU25,000. 2 The total finance charge to be recognised in profit or loss over the lease term is CU75,000. A Statement 1 only B Statement 2 only C Statement 1 and statement 2 D Neither statement 12. The Caspian Company leased a warehouse with adjoining land for a period of 15 years. The fair values of the leasehold interests in the land and of the warehouse are CU502,000 and CU251,000 respectively. The land has an indefinite economic life whereas the warehouse has a useful life of 15 years. Title to the land is not expected to pass at the end of the lease. Under IAS17 Leases, at what amount should the assets in relation to finance leases be recognised in the financial statements of Caspian? A Nil B CU753,000 C CU502,000 D CU251,000 13. The Maconie Company is a car dealer. On 1 January 20X7 it entered into a finance lease with a customer under which the customer would pay CU20,000 on 1 January each year for 5 years, commencing in 20X7. The car cost Maconie CU60,000 and its normal cash selling price was CU75,000. Maconie paid legal fees of CU2,000 to a law firm in connection with the arrangement of the lease. Ignoring finance income, what net amount should Maconie recognise in profit or loss in the year ended 31 December 20X7, according to IAS17 Leases? A Net income of CU15,000 B Nil C Net expense of CU2,000 D Net income of CU13,000