ACCA FR · Chapter 6
Leases MCQs with Answers
9 multiple-choice questions on Leases for ACCA FR Financial Reporting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under IFRS 16, what does a lessee normally recognise at the commencement date of a lease?
- A) A rental expense spread evenly over the lease term only
- B) A lease liability only, with payments expensed as incurred
- C) A right-of-use asset and a lease liability
- D) A right-of-use asset only, with the matching credit taken to equity
Show answer & explanation
Answer: C) A right-of-use asset and a lease liability
IFRS 16 uses a single lessee accounting model. At commencement the lessee recognises a lease liability, measured at the present value of the lease payments not yet paid, and a right-of-use asset. The only exceptions are the optional exemptions for short-term leases and leases of low-value assets.
Question 2
On 1 January Wren Co leased a machine for 5 years. Payments of $50,000 are made annually in arrears. The interest rate implicit in the lease is 8%, giving a 5-year annuity factor of 3.9927. Wren Co paid initial direct costs of $5,000. At what amount should the right-of-use asset first be recognised? (Round to the nearest dollar.)
- A) $199,635
- B) $255,000
- C) $204,635
- D) $250,000
Show answer & explanation
Answer: C) $204,635
Lease liability = PV of payments = $50,000 x 3.9927 = $199,635 (to the nearest dollar). The right-of-use asset is the lease liability plus initial direct costs (and any payments made at or before commencement): $199,635 + $5,000 = $204,635.
Question 3
Following on from the Wren Co lease (initial liability $199,635, payments of $50,000 annually in arrears, interest at 8%), what current liability for the lease should be shown at the end of year 1? (Round to the nearest dollar.)
- A) $50,000
- B) $165,606
- C) $34,029
- D) $36,752
Show answer & explanation
Answer: D) $36,752
Year 1: $199,635 + interest $15,971 - payment $50,000 = $165,606 closing liability. Year 2: $165,606 + interest $13,248 - $50,000 = $128,854. The non-current liability at the end of year 1 is the balance that will still be outstanding after the next payment, $128,854. Current liability = $165,606 - $128,854 = $36,752. This is the capital part of the next payment.
Question 4
On 1 January Finch Co leased equipment for 4 years at $30,000 a year, payable annually in advance starting on 1 January. The interest rate implicit in the lease is 6%, and the 3-year annuity factor at 6% is 2.6730. What is the total lease liability at 31 December of the first year? (Round to the nearest dollar.)
- A) $85,001
- B) $80,190
- C) $86,801
- D) $120,000
Show answer & explanation
Answer: A) $85,001
The first payment is made at commencement, so it is not part of the lease liability. Liability = PV of the remaining 3 payments = $30,000 x 2.6730 = $80,190. Interest for year 1 at 6% = $4,811, giving $85,001 at 31 December. The next payment of $30,000, due on 1 January, is the current portion.
Question 5
Under IFRS 16, which of the following leases qualifies for the short-term lease exemption?
- A) A 3-year lease of a vehicle that the lessee will sublet
- B) A 12-month lease that includes an option to purchase the asset
- C) A 5-year lease that the lessee expects to terminate early
- D) A lease with a term of 10 months that contains no purchase option
Show answer & explanation
Answer: D) A lease with a term of 10 months that contains no purchase option
A short-term lease has a lease term of 12 months or less at commencement and no purchase option. If the exemption is chosen, lease payments are expensed on a straight-line basis over the lease term and no right-of-use asset or lease liability is recognised.
Question 6
On 1 July 20X5 Robin Co took a 10-month lease of storage space at $2,000 a month, with the first month rent-free. Robin Co applies the IFRS 16 short-term lease exemption. What expense should be recognised for the year ended 31 December 20X5?
- A) $10,000
- B) $10,800
- C) $12,000
- D) $18,000
Show answer & explanation
Answer: B) $10,800
Total payments = (10 - 1) x $2,000 = $18,000. Under the exemption this is expensed on a straight-line basis over the 10-month term: $1,800 a month. Expense for July to December = $1,800 x 6 = $10,800. The amount actually paid in the period ($10,000) is not the expense.
Question 7
Thrush Co recognised a right-of-use asset of $204,635 for a 5-year lease of a machine with a useful life of 7 years. Ownership does not transfer to Thrush Co at the end of the lease, and there is no purchase option. What is the annual depreciation charge on the right-of-use asset? (Round to the nearest dollar.)
- A) $40,927
- B) $29,234
- C) $34,106
- D) Nil; only the interest on the lease liability is expensed
Show answer & explanation
Answer: A) $40,927
If ownership does not transfer and there is no purchase option that is reasonably certain to be exercised, the right-of-use asset is depreciated over the shorter of the lease term and the useful life. That is 5 years: $204,635 / 5 = $40,927. The useful life of 7 years would be used only if ownership was expected to transfer.
Question 8
Nightjar Co sold its head office to a bank for $10,000,000, which is its fair value, and immediately leased it back for 10 years. The building's carrying amount was $6,000,000. The transfer meets the IFRS 15 definition of a sale. The present value of the lease payments is $3,000,000. What gain on disposal should Nightjar Co recognise in profit or loss?
- A) $4,000,000
- B) $1,200,000
- C) Nil; the whole gain is deferred over the lease term
- D) $2,800,000
Show answer & explanation
Answer: D) $2,800,000
Total gain = $10,000,000 - $6,000,000 = $4,000,000. The right-of-use asset is measured at the proportion of the old carrying amount that relates to the right retained: $6,000,000 x $3,000,000/$10,000,000 = $1,800,000 (this is the asset, not the gain). Only the gain on the rights transferred to the bank is recognised: $4,000,000 x ($10,000,000 - $3,000,000)/$10,000,000 = $2,800,000. The remaining $1,200,000 relates to the rights retained and is not recognised. Check: Dr cash $10,000,000, Dr right-of-use asset $1,800,000, Cr building $6,000,000, Cr lease liability $3,000,000, Cr gain $2,800,000.
Question 9
Bunting Co sold a property to a finance company and leased it back. The terms give Bunting Co an option to repurchase the property at any time, so the transfer does not meet the IFRS 15 requirements to be accounted for as a sale. How should Bunting Co account for the transaction?
- A) Derecognise the property and recognise the full profit on sale immediately
- B) Derecognise the property and recognise a right-of-use asset and a lease liability
- C) Keep the property in its SFP and recognise the proceeds as a financial liability under IFRS 9
- D) Keep the property and credit the proceeds to deferred income, released over the lease term
Show answer & explanation
Answer: C) Keep the property in its SFP and recognise the proceeds as a financial liability under IFRS 9
If control has not passed to the buyer, there is no sale. The seller-lessee keeps the asset and continues to depreciate it. The cash received is a financial liability (in substance a secured loan) accounted for under IFRS 9, with lease payments split between interest and repayment of that liability.