2025 Financial Accounting Theory and Practice Group T2
Questions for group discussion: As a group, please decide whether each of the following
25 items are true or false.
Please note: Only ONE group member should please complete the quiz online. You can
upload the quiz answers unlimited times and the last version will be marked. Please
be careful as the order of the questions will shift in the online version! You can use
the question numbers nexto the question text to refer back to the questions below.
True/False
1) Both lessors and lessees need to determine whether a lease is a finance lease or an operating
lease.
2) The lease standard provides a single lessee accounting model, requiring lessees to recognise
assets and liabilities for all leases unless the lease term is 12 months or less or the underlying
asset has a low value.
3) Unless the exceptions apply, lessees need to recognise a right-of-use asset and lease liability
in their accounting records.
4) The lessee is not allowed to capitalise their initial direct costs to the ‘right-of-use asset’
account, they need to expense such costs.
5) Lessees need to amortise the right-of-use asset over the asset’s full useful life, even if the
lease period is shorter.
6) Lessees need to recognise the interest and capital portion of their lease payments; the capital
portion reduces the lease liability.
7) If a lessee pays $120 000 per year to the lessor, including $20 000 for maintenance, then the
$20 000 is treated as an expense by the lessee and is not included in the computation of the
lease liability and right-of-use asset.
8) If the exceptions apply, and the lessee pays $100 per month for 11 months, the journal entry
each month is: Dr Lease expense $100, Cr Cash at Bank $100.
9) If a lessor has an operating lease, then they will remove the asset from their accounting
records as the significant risks and rewards of ownership have moved from the lessor to the
lessee.
10) If the lessor is a financier lessor and decides the lease is a finance lease, they will remove the
asset from their accounting records and replace it with another asset, ‘Lease receivable’,
which is essentially a debit loan.
11) If the lessor is a financier lessor and decides the lease is a finance lease, they will split the
lease receipts into an interest revenue and capital repayment portion. The capital repayment
portion will reduce the ‘Lease receivable’ balance.
12) If the lessor is a financier lessor and decides the lease is an operating lease, then they will
leave the asset in their accounting records and depreciate the asset.
13) If the lessor is a financier lessor and decides the lease is an operating lease, then they will
record the following for the lease payments received of $100 per month: Dr Cash at Bank
$100, Cr Lease Income $100.
14) In general, at inception date, a financier lessor with a finance lease records a lease receivable
equal to the fair value of the asset plus any initial direct lessor costs.
15) In general, at inception date, a financier lessor with a finance lease records a lease receivable
equal to the fair value of the asset plus any initial direct lessee costs.
16) In general, at inception date, a financier lessor with a finance lease records a lease receivable
equal to the fair value of the asset plus any initial direct lessor costs. The lease receivable
amount can also be calculated as the present value of the lease payments plus the present
value of the unguaranteed residual amount.

For questions 17 to 25, please refer to the scenario below:

On 1 July 2023, Salt Ltd leased a machine from Pepper Ltd. The machine cost Pepper Ltd $126
548, considered to be its fair value on that same day. The lease term is 3 years. The annual
payment, payable in arrears on 30 June each year is $45 000. Of the $45 000, $3 000 is for
maintenance executory cost. Salt Ltd incurred an initial direct cost of $2 000 relating to the
lease. The estimated economic life of the machine is 4 years. The estimated residual value of
machine at end of lease term is $20 000. The residual value guaranteed by Salt Ltd is $0. Salt
plan to return the machine to Pepper after the lease. The interest rate implicit in the lease is 7%.
The lease is cancellable, but only with the permission from Pepper Ltd. Pepper Ltd is a financier
lessor and treats this lease as a finance lease. Note: The present value interest factor of an
annuity of 3 payments of $1 at 7% is 2.6243. The present value interest factor of a lumpsum of
$1 over 3 years is 0.8163.

17) On 1 July 2023, Salt Ltd will recognise a lease liability equal to the present value of three
payments of $45 000.
18) On 1 July 2023, Salt Ltd will recognise a lease liability equal to the present value of three
payments of $42 000.
19) On 1 July 2023, Salt Ltd will recognise a right-of-use asset equal to the lease liability plus the
initial direct costs of $2 000.
20) At 30 June 2024, Salt will record amortisation of the right-of-use asset computed over a useful
life of 4 years.
21) At 30 June 2024, Salt will record interest expense computed as 7% of the initial lease liability
and reduce the lease liability by ($42 000 – interest portion).
22) At 1 July 2023, Pepper Ltd will record a lease receivable asset equal to the fair value of $126
548 (note there are no initial direct costs of the lessor).
23) At 1 July 2023, Pepper Ltd will record a lease receivable asset equal to $126 548, which is the
present value of the three receipts of $42 000 plus the present value of the unguaranteed residual
of $20 000 (i.e. 42 000 x 2.6243 + 20 000 x 0.8163 = 126,546.60 (rounding difference)).
24) At 30 June 2024, Pepper Ltd will record Dr Maintenance cost 3 000, Cr Cash at Bank 3 000.
25) At 30 June 2024, Pepper Ltd’s journal will include Dr Cash at Bank 3 000, Cr Recoupment of
maintenance cost 3 000.

Good luck!


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