Finance Lease Quiz

A lease is classified as a finance lease by the lessor if it:

• Transfers ownership of the asset to the lessee by the end of the lease term.

• Gives the lessee the option to purchase the asset at a bargain price.

• Covers a major part of the useful life of the asset.

• All of the above.

Which of the following is NOT a key criterion used by a lessor to classify a lease as either finance or operating?

• The lease term is for a major part of the asset's remaining useful life.

• The present value of the lease payments amounts to substantially all of the asset's fair value.

• The lessee can cancel the lease.

• Ownership of the asset transfers to the lessee by the end of the lease term.

Under IFRS 16, how does a lessor account for a finance lease?

• Recognizes lease payments as revenue on a straight-line basis over the lease term.

• Derecognizes the underlying asset and recognizes a net investment in the lease.

• Continues to recognize the underlying asset and recognizes lease payments as revenue.

• Recognizes a contingent liability for the lease payments.

On January 1, 2025, Lessor A enters into a 5-year finance lease with Lessee B for equipment with a fair value of $100,000. The lease payments are $25,000 per year, payable at the end of each year. The implicit interest rate in the lease is 8%. What is the net investment in the lease (lease receivable) that Lessor A should recognize on January 1, 2025?

• $75,000

• $90,196

• $100,000

• $105,230

Lessor E leases equipment to Lessee F under a 5-year finance lease. The fair value of the equipment at the inception of the lease is $200,000. The lease payments are $50,000 per year, payable at the beginning of each year. The implicit interest rate in the lease is 6%. What is the net investment in the lease Lessor E should recognize immediately after the first lease payment is received?

• $150,000

• $161,887

• $173,255

• $200,000

Lessor G enters into a 10-year finance lease with Lessee H for a building. The present value of the minimum lease payments is $1,000,000. The building's carrying amount on Lessor G's books is $800,000. Lessor G incurred initial direct costs of $50,000 related to the lease. What is the total amount Lessor G should recognize in its balance sheet related to the lease immediately after the lease commences?

• $950,000

• $1,000,000

• $1,050,000

• $1,250,000

A lessor modifies a finance lease by extending the lease term. The modification does not result in a separate lease. How should the lessor account for this modification?

• Account for the modification as a new lease.

• Reassess the lease classification and account for it as either a finance or operating lease based on the modified terms.

• Adjust the carrying amount of the net investment in the lease to reflect the revised lease payments, discounting them using the original discount rate.

• Recognize a gain or loss in profit or loss based on the change in lease payments.

A lessor modifies an operating lease by increasing the lease payments. The modification does result in a separate lease. How should the lessor account for the separate lease?

• Account for the separate lease as a finance lease.

• Account for the separate lease as an operating lease.

• Combine the separate lease with the original lease and account for them as one lease.

• Do not account for the separate lease as it is immaterial.

A lessor modifies a finance lease by decreasing the lease payments. The modification does not result in a separate lease, and the lease remains classified as a finance lease. What is the primary impact of this modification on the lessor's financial statements?

• No impact, as the lease classification remains unchanged.

• An immediate gain is recognized in profit or loss.

• The carrying amount of the net investment in the lease is adjusted.

• A new lease is recognized.

A lessor modifies an operating lease by granting the lessee an option to purchase the asset at the end of the lease term. The modification does not result in a separate lease. How should the lessor account for this modification if the option is deemed a finance lease?

• Continue accounting for the lease as an operating lease.

• Account for the modified lease as a finance lease prospectively from the date of the modification.

• Account for the modified lease as a finance lease retrospectively.

• Recognize a gain or loss in profit or loss.