LECTURE NOTES

BASIC CONCEPTS
Under PFRS 16, LEASE is a CONTRACT or part of a contract that conveys the right to use an underlying asset for a period
of time in exchange for consideration.
In a lease contract, the parties are:
 LESSEE – The entity that obtains the right to use an underlying asset for a period of time in exchange for
consideration.
 LESSOR – The provides the right to use an underlying asset for a period of time in exchange for consideration.
RIGHT TO CONTROL THE USE OF THE ASSET
An entity has the right to control the use of an identified asset if it has both of the following throughout the period of use:
 The right to obtain substantially all of the economic benefits from the use of the identified asset.
The customer can obtain substantially all of the economic benefits from the use of the asset by having EXCLUSIVE
USE of the asset throughout the period.
 The right to direct the use of the identified asset.
A customer has the right to direct use of the asset when the customer has the right to DIRECT HOW and
FOR WHAT PURPOSE the asset is used throughout the period of use.
IDENTIFIED ASSET
An identified asset is requirement for a contract of lease to exist. An asset can be identified by being EXPLICITLY
specified in a contract or IMPLICITLY specified when made available to the customer.
NOTES:
 PORTIONS OF ASSETS: A portion of an asset is an identified asset if it is physically distinct. If not physically
distinct, the portion is not an identified asset, unless it represents substantially all of the capacity of the asset
thereby providing the customer the right to obtain substantially all of the economic benefits from the asset.
 SUBSTANTIVE SUBSTITUTION RIGHTS: An asset is not an identified asset if the supplier has the substantive right to
substitute it throughout the period of use.
LEASE TERM
PFRS 16 defines lease term as the NON-CANCELLABLE period of for which the lessee has the right to use the
underlying asset together with both:
 Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option.
 Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.
ACCOUNTING FOR LEASES – LESSEE
Under PFRS 16, a lessee shall account the lease by recognizing a LEASE LIABILITY and RIGHT-OF-USE ASSET at the
commencement date.
Simply stated, the general accounting of leases on the lessee’s perspective is FINANCE LEASE.
On the other hand, a lessee may elect not to apply the FINANCE LEASE MODEL and make an accounting policy election to
apply the operating lease model in two OPTIONAL EXEMPTIONS.
1) SHORT-TERM LEASE
This is a lease that has a term of 12 MONTHS OR LESS at the commencement of the lease.
NOTE: A lease that contains a purchase option is NOT a short-term lease. The election of short-term lease is made
based on the class of underlying asset to which the right of use relates.
2) LOW VALUE LEASE
The assessment of value is based on the value of the asset when it is new, regardless of the age of the asset being
leased.
Typically, low value underlying assets include personal computers, office furniture and
telephones. NOTE: Low value asset is a matter of PROFESSIONAL JUDGMENT
MEASUREMENT OF LEASE LIABILITY

Lease payments include:

 Fixed payments less any lease incentives receivable
 Variable lease payments
 Amounts expected to be payable by the lessee under residual value guarantees
 Exercise price of a purchase option if the lessee is reasonably certain to exercise that option
 Termination penalties if the lease term reflects the exercise of a termination
option NOTE: Executory costs are EXPENSED IMMEDIATELY when incurred.
The lease payments above shall be discounted using the IMPLICIT INTEREST RATE in the lease. If that rate is not
readily determinable, the lessee’s INCREMENTAL BORROWING RATE is used.
IMPLICIT INTEREST RATE: The rate that causes the present value of the lease payments and the
unguaranteed residual value to equal the fair value of the underlying
asset and initial direct costs of the lessor.
INCREMENTAL BORROWING RATE: The rate of interest that the lessee would have to pay to borrow funds
necessary to obtain a similar asset over a similar term and similar
security.
SUBSEQUENT MEASUREMENT
The lease liability is subsequently measured similar to an AMORTIZED COST financial liability.
MEASUREMENT OF RIGHT-TO-USE ASSET
INITIAL MEASUREMENT
The right-of-use asset is initially measured at COST. The cost comprises the following:
 The amount of the initial measurement of the lease liability
 Any lease payments made at or before commencement date, less any lease incentives received
 Any initial direct costs incurred by the leases
 The present value of any decommissioning and restoration costs for which the entity has incurred an obligation
SUBSEQUENT MEASUREMENT
The right-of-use asset is subsequently measured under COST MODEL, which is COST LESS ANY ACCUMULATED
DEPRECIATION AND IMPAIRMENT LOSS.
EXEMPTIONS FOR SUBSEQUENT MEASUREMENT
 If the asset relates to a class of PPE that is measured under the REVALUATION MODEL, the asset may be measured
under REVALUATION MODEL.
 If the asset meets the definition of an investment property and the entity uses the FAIR VALUE MODEL, the asset is
measured under FAIR VALUE MODEL.
DEPRECIATION
PFRS 16 provides that the lessee shall depreciate the right-of-use asset over the USEFUL LIFE OF THE UNDERLYING
ASSET under the following conditions:
 The lease contract TRANSFERS OWNERSHIP to the lessee by the end of the lease term.
 There is a reasonable certainty that the lessee will exercise a PURCHASE OPTION.
An any other case, the lessee depreciates the underlying asset over the shorter of the asset’s useful life and the lease
term.
Depreciation starts from the commencement date of the lease.
OTHER ACCOUNTING ISSUES
1) SEPARATING THE COMPONENTS OF A CONTRACT
An entity accounts for each lease component of a contract separately from the non-lease components of that
contract.
A lessee allocates the consideration in the contract to each lease component based on the RELATIVE STAND-
ALONE PRICE of the lease component and the aggregate stand-alone price of the non-lease components.
2) VARIABLE LEASE PAYMENTS
The accounting for variable lease payments depends on the nature of variability.
Type of Variable Payment Initial Accounting Subsequent Accounting
Include in lease liability and Adjust lease liability and right-of-
right-of use asset based on use asset when the revised index
Based on index or rate
the level or rate at the or rate changes the lease
commencement date payments
Recognized as expense when
Others (based on sales or usage) Exclude from lease liability and event or condition that
right-of-use asset triggers payment occurs
In-substance fixed payments Treat as fixed lease payments Treat as fixed lease payments

3) GUARANTEED RESIDUAL VALUE

Residual value guarantee is a guarantee made to a lessor by a party unrelated to the lessor that the value of an
underlying asset at the end of a lease will be at least a specified amount.
As to the lessee, a residual value is guaranteed if it is:
 Guaranteed by the lessee or
 Guaranteed by a party related to the lessee.
When a lessee accounts for a residual value, this presupposes that the asset will REVERT BACK to the lessor at the
end of the lease term. If the asset does not revert back to the lessor, the residual value is not guaranteed because
it inures to the benefit of the lessee rather than the lessor.
4) LEASE MODIFICATIONS
PFRS 16 provides that the lessee shall account for the lease modification as a separate lease under the following
conditions:
 The modification increases the scope of the lease by adding the right to use an additional underlying asset.
 The rental for the lease modification increases by an amount commensurate with the increase in scope of
equivalent to the current market rental.
5) PRESENTATION
RIGHT-OF-USE ASSET (NON-CURRENT ASSET)
This asset is presented either:
 Separately from other assets or
 Together with other assets as if they were owned, with disclosure of the line items that include the right-
of- use assets.
LEASE LIABILITY (CURRENT LIABILITY AND NON-CURRENT LIABILITY)
This liability are presented either
 Separately from other liabilities
 Together with other liabilities, with disclosure of the line items that include the lease liabilities
ACCOUNTING FOR LEASES – LESSOR
Lessor accounting under PFRS 16 is substantially the same as the old lease standard, PAS 17. PFRS 16 provides that
the lessor shall classify leases as either an operating lease or a finance lease.
Under PFRS 16, among others, any of the following situations would normally lead to a lease being classified as a finance
lease:
a. The lease transfers ownership of the leased asset to the lessee at the end of the lease term.
b. The lessee has an option to purchase the asset at a price which is expected to be sufficiently lower than the
fair value at the date the option becomes exercisable.
c. The lease term is for the major part of the economic life of the asset even if title is not
transferred. Under US GAAP, "major part" means at least 75% of the economic life of an asset.
d. The present value of the minimum lease payment amounts to substantially all of the fair value of the leased asset
at the inception of the lease.
Under US GAAP, "substantially all" means at least 90% of the fair value of the leased asset.
PFRS 16 also provide that, individually or in combination, the following situations could also lead to a lease being
classified as finance lease:
a. The leased asset is of a specialized nature such that only the lessee can use it without major modification.
b. If the lessee cancels the lease, the lessor's losses associated with the cancelation are borne by the lessee.
c. Gains or losses from fluctuation in the fair value of the residual fall to the lessee.
d. The lessee has the ability to continue the least for a secondary period at a rent which is substantially lower
than market rent.
INCEPTION AND COMMENCEMENT DATE
Inception of the lease is the earlier of the date of the lease agreement and the date of commitment by the parties to
the principal provisions of the lease.
Accordingly, this is the date:
 When a lease is classified as either an operating lease or a finance lease.
 When the amounts to be recognized at the commencement of the lease are determined for a finance lease.
Commencement of the lease is the date from which the lessee is entitled to exercise its right to use the leased asset. In
other words, the commencement of the lease is the date of initial recognition of the assets, liabilities, income or
expenses resulting from the lease.
On the part of the lessor, a finance lease is either:
 Direct financing lease
 Sales type lease
The main difference between the two is the presence or absence of a manufacturer or dealer profit or loss.

DIRECT FINANCING LEASE

The lessor in a direct finance lease is actually engaged in the financing business. Thus, this type of lease is an
arrangement between a financing entity and a lessee.
The income of the lessor is INTEREST INCOME only.
The following terms are used in a direct finance
lease:
a. Gross investment in the lease - the gross investment in the lease is equal to the gross rentals for the entire lease
term plus the absolute amount of the residual value, whether guaranteed or unguaranteed. Actually, this is the
amount debited to lease receivable.
b. Net investment in the lease - the net investment in the lease is equal to the cost of the asset plus any initial direct
cost incurred by the lessor.
c. Unearned interest income - the unearned interest income is the total financial revenue of the lessor which is the
difference between the gross investment and net investment in the lease.
d. Initial direct cost - in a direct financing lease, the initial direct cost incurred by the lessor is added to the cost of the
asset to get the net investment in the lease. This would effectively spread the initial direct cost over the lease term
and reduce the amount of interest income. Accordingly, the interest rate implicit in the lease is recomputed so as
to include the initial direct cost in the measurement of the lease receivable.
RESIDUAL VALUE
Unlike for lessees who account for guaranteed residual value only, lessors account for BOT GUARANTEED AND
UNGUARANTEED RESIDUAL VALUES, provided the asset REVERTS back to the lessor at the end of the lease term.
As to the lessee, a residual value is guaranteed if it is:
 Guaranteed by the lessee or
 Guaranteed by a party related to the lessee.
 Guaranteed by a third party unrelated to the lessor that is financially capable of discharging the obligations
under the guarantee.
SALES TYPE LEASE
The lessor in a sales type lease is actually a manufacturer or dealer that uses the leases as a means of facilitating the
sale of product.
The income of the lessor includes INTEREST INCOME and DEALER PROFIT OR LOSS. The
following terms are used in a direct finance lease:
 Gross investment - This is equal to the gross rentals for the entire lease term plus the absolute amount of the
residual value, whether guaranteed or unguaranteed.
 Recall that this is the same definition of gross investment in a direct financing lease.
 Net investment in the lease - This is equal to the present value of the gross rentals plus the present value of
the residual value, whether guaranteed or unguaranteed.
 Unearned interest income - This is the total financial revenue of the lessor which is the difference between
the gross investment and net investment in the lease.
 Sales — The amount is equal to the net investment in the lease or fair value of the asset, whichever is lower.
 Cost of sales - This is equal to the cost of the asset sold plus the initial direct cost incurred by the lessor.
 Gross profit - This is the usual formula of sales minus cost of sales.
 Initial direct cost - This amount is expensed immediately in a sales type lease as component of cost of sales.
CLASSIFICATION OF LAND AND BUILDING LEASE
When classifying a lease on land and building, an entity normally considers the land and building elements separately.
A land lease with a lease term of several decades or longer may be classified as finance lease even if title will not pass to
the lessee at the end of the lease term.
The minimum lease payments are allocated between the land and building elements in proportion to the relative fair
value of the leasehold interests in the land and building elements at the inception of the lease. If the lease payments
cannot be allocated reliably between the two elements, the entire lease is classified as a finance lease, unless it is clear
that both elements are operating leases.
OPERATING LEASE
An operating lease is a lease that does not transfer substantially all the risks and rewards incidental to ownership of an
underlying asset.
The accounting for operating leases is STRAIGHT-FORWARD. The lessor recognizes the lease payments as income on a
straight-line basis over the lease term, unless other systematic basis is more representative of the patter in which benefit
from the use of the underlying asset is diminished.
This accounting treatment of the lessor is the same for the accounting treatment of lessees for operating leases.

The following items are under consideration for operating leases:

1) INITIAL DIRECT COSTS
Initial direct costs are often incurred by the lessor and include amounts such as commissions, legal fees and
internal costs that are incremental and directly attributable to negotiating and arranging a lease.
Initial direct costs incurred by lessor in an operating lease shall be added to the carrying amount of the leased
asset and recognized as an expense over the lease term on the same basis as the lease income.
2) DEPRECIATION
The leased asset remains the asset of the lessor under an operating lease. Therefore, the lessor continues to
depreciate it.
3) LEASE BONUS
Any lease bonus received by the lessor from the lessee is recognized as unearned rent income to be amortized
over the lease term.
A lease bonus paid by the lessee to the lessor in addition to the periodic rental is treated as prepaid rent expense
by the lessee to be amortized over the lease term.
4) SECURITY DEPOSITS
Any security deposit refundable upon the lease expiration shall be accounted for as liability by the lessor.
Any security deposit refundable upon the lease expiration is accounted for as an asset by the lessee.
SALE AND LEASEBACK TRANSACTIONS
A sale and leaseback transaction is an arrangement whereby one party sells a property to another party and then
immediately leases the property back from its new owner.
This transaction results to a scenario wherein the seller becomes a seller-lessee and the purchaser, a purchaser-lessor.
To account for these transactions, both the seller-lessee and buyer-lessor determine whether the transfer qualifies as a
sale based on the requirements for satisfying a performance obligation in PFRS 15.
TRANSFER QUALIFIES AS A SALE
If the transfer qualifies as a sale under PFRS 15:
 The seller-lessee shall:
o Measure the right-of-use asset arising from the leaseback at the proportion of the previous carrying
amount of the asset that relates to the right of use retained by the seller-lessee and
o Recognize only the amount of any gain or loss that relates to the rights transferred to the buyer-lessor
 The buyer-lessor shall account for the purchase of the asset applying applicable standards and for the lease
applying the lessor accounting under PFRS 16.
The following adjustments shall be made to measure the sale proceeds at fair value if the sales price is not equal to the
fair value of the asset or if the lease payments are not at market rates:
 Any below-market terms shall be accounted for as a prepayment of lease payments.
 Any above-market terms shall be accounted for as additional financing provided by the buyer-lessor to the seller-
lessee.

The adjustment is measured based on the more readily determinable of:

 The difference between the fair value of the consideration for the sale and the fair value of the asset.
 The difference between the present value of the contractual payments for the lease and the present value
of payments for the lease at market rates.

TRANSFER OF THE ASSET IS NOT A SALE

If the transfer does not qualify as a sale, the parties shall account for it as a financing transaction. Accordingly,
 The seller-lessee continues to recognize the asset and accounts for the amounts received as a financial liability
under PFRS 9.
 The buyer-lessor does not recognize the transferred asset and accounts for the amounts paid as a financial asset
under PFRS 9.
STRAIGHT PROBLEMS
FINANCE LEASE – LESSEE
1. On January 1, 2020, MIRANA CORP. entered into a 4-year lease agreement with another entity for machine. Lease
payment is P200,000 payable annually starting on January 1, 2020. MIRANA knows that the lessor expects a 10%
return on the lease. MIRANA has a 12% incremental borrowing rate. The machine is expected to have an
estimated useful life of 5 years and a residual value of P50,000. The lease agreement contained a purchase option
at P100,000 exercisable at the end of the lease term. It is reasonably certain as of inception of the lease that
MIRANA will exercise the option in the future. MIRANA uses the straight-line method of depreciation.
REQUIREMENTS:
(1) What is the initial measurement of right-of use asset and finance lease liability on January 1, 2020?
(2) What are the carrying amounts of right-of use asset and finance lease liability on December 31, 2020?
(3) Provide the journal entry after the lease-term when the purchase option is exercised.
(4) Provide the journal entry after the lease-term when the purchase option is not exercised.
2. MARCI CORP. leased factory equipment on January 1, 2020 with the following information:
Fixed annual payment at the end of each year P500,000
Lease term 4 years
Useful life of equipment 5 years
Implicit rate 10%.
MARCI guaranteed a 100,000 residual value on December 31, 2023 to the lessor.
REQUIREMENTS:
(1) What is the initial measurement of right-of use asset and finance lease liability on January 1, 2020?
(2) What are the carrying amounts of right-of use asset and finance lease liability on December 31, 2020?
(3) Determine the current and non-current portion of the carrying amount of the lease liability on December
31, 2020.
(4) Assuming the fair value of the underlying asset on December 31, 2023 is P80,000, what is the gain or loss
on finance on 2023?
(5) Assuming the residual value is unguaranteed; repeat the requirements in (1) and (2).
(6) Assuming that the residual value is unguaranteed and MARCI actually purchased the equipment on
December 31, 2021 for P1,200,000, what would be the journal entry?
3. On January 1, 2020, BALANAR INC. leased an industrial machine with the following information:
Annual fixed payment at the end of each year P1,000,000
Initial direct costs 250,000
Lease incentive received 150,000
Residual value guaranteed 300,000
Lease term 5 years
Useful life of the machine 6 years
Implicit interest rate 8%
REQUIREMENTS:
(1) What is the initial measurement of right-of use asset and finance lease liability on January 1, 2020?
(2) What are the carrying amounts of right-of use asset and finance lease liability on December 31, 2020?
4. On January 1, 2020, CLOCKWORKCORP. enters into a 4-year lease of property with annual lease payments of
P100,000, payable at the end of each year. The contract states that lease payments will increase after two years
based on the increase in the Consumer Price Index (CPI) in the preceding 2 years. The rate implicit in the lease is
not readily determinable. CLOCKWORKCORP.’s incremental borrowing rate is 12%. CLOCKWORK uses straight-line
depreciation.
The CPIs are as follows:
January 1, 2020 125
January 1, 2022 150
REQUIREMENTS:
(1) What is the initial measurement of right-of use asset and finance lease liability on January 1, 2020?
(2) What are the carrying amounts of right-of use asset and finance lease liability on December 31, 2020?
(3) What are the carrying amounts of right-of use asset and finance lease liability on December 31, 2021?
5. NAIX CORP. entered into a lease of building on January 1, 2020 with the following information:
Annual rental payable at the end of each year P300,000
Lease term 5 years
Useful life of the building 20 years
Implicit rate of interest 9%
 The lease contained an option for the lessee to extent the lease for a further 5 years. At the commencement date,
the exercise of the extension option is NOT reasonably certain because the entity believes there is no economic
incentive to do so.
After 3 years, on January 1, 2023, the lessee decided to extent the lease for a further 5 years.
New annual rental payable at the end of each year P400,000
New implicit rate 12%
REQUIREMENTS:
(1) Prepare an amortization table for 2020, 2021 and 2022.
(2) Remeasure the lease liability on January 1, 2023.
(3) Prepare a new amortization table for 2023 to 2029.
6. On January 1, 2020, an entity entered into a lease agreement with the following information:
Floor space 3,000 square meters
Annual rental payable at the end of each year 100,000
Implicit rate in the lease 10%
Lease term 8 years
On January 1, 2022 the entity and the lessor agreed to amend the original terms of the lease with the following
information:
Additional floor space 4,500 square meters
Increase in rental payable at the end of each year 200,000
Implicit rate in the lease 8%
The increase in the rental for the additional 4,500 square meters is equivalent to the current market rent.
REQUIREMENT: Prepare the journal entries for 2020 and in 2023 pertaining to the lease modification.
FINANCE LEASE – LESSOR
7. URSA CORP. is in the business of leasing new hi-tech equipment. As lessor, URSA expects a 12% return on the net
investment. All leases are classified as direct financing lease. At the end of the lease term, the equipment will
revert to URSA CORP. On January 1, 2020, an equipment is leased to another entity with the following information.
Cost of equipment to URSA CORP. 5,000,000
Residual value - unguaranteed 600,000
Annual rental payable in advance 900,000
Initial direct cost 250,000
Useful life and lease term 8 years
Implicit interest rate 12%
REQUIREMENTS:
(1) What is the gross investment in the lease?
(2) What is the net investment in the lease?
(3) What is the total interest income over the lease term?
(4) What is the interest income for the current year?
8. MEDUSA CORP. is a dealer in machinery. On January 1, 2020, a machinery is leased to another entity with the
following provisions:
Annual rental payable at the end of each year P800,000
Lease term 5 years
Useful life of machinery 5 years
Cost of machinery 2,000,000
Initial direct cost 100,000
Estimated residual value 200,000
Implicit interest rate 10%
At the end of the lease term on December 31, 2024, the machinery will revert to MEDUSA CORP.
REQUIREMENTS:
(1) What is the gross investment in the lease?
(2) What is the net investment in the lease?
(3) What is the gross profit on sale?
(4) What is the interest income for the current year?
OPERATING LEASES
9. VISAGE CORP. is engaged in leasing heavy equipment. On December 1, 2020, the entity bought a second hand
heavy equipment for P750,000. In December 31, 2020, the entity incurred P150,000 for a major overhaul to put
the equipment in good running condition. The equipment has an estimated useful life of 5 years and the entity is
 using the straight-line method of depreciation.
On April 1, 2021, VISAGE leased the equipment to TYL CORP. for 3 years up to March 31, 2024. VISAGE incurred
insurance and property tax expense totaling P120,000 for 2021. Additionally, TYL paid P300,000 to VISAGE as a
lease bonus to obtain the three-year lease. VISAGE paid P90,000 commission associated with negotiating the lease
The annual lease payments are shown in the following schedule:
March 31, 2022 P600,000
March 31, 2023 900,000
March 31, 2024 1,200,000
REQUIREMENTS:
(1) Prepare the journal entries on the books of the lessor and lessee for the year 2020, 2021 and 2022.
(2) What is to be reported as net rental income by VISAGE for the year 2021?

SALE AND LEASEBACK

10. On January 1, 2020, VOID CORP. sells a building to PICION CORP. and simultaneously leases it back. Additional
information follows:
Fair value of the building 500,000
Carrying amount of building 400,000
Remaining useful life of building 10 years
Lease term 5 years
Annual rent payable at the end of each year 50,000
Implicit interest rate equal to market rate
12%
The transfer qualifies as a sale
REQUIREMENT: Prepare the journal entries to account the sale and leaseback transaction on both books of the
seller-lessee and buyer-lessor under the following assumptions:
(a) The sale price is P500,000 (c) The sale price is P450,000
(b) The sale price is P550,000 (d) Assuming the transfer does not qualify as sale
11. On January 1, 2020, DAZZLE sold a building with remaining life of 25 years and immediately leased it back for 3
years. Sales price at fair value P5,000,000
Carrying amount 6,000,000
Annual rental payable at the end of each year 250,000
Implicit interest rate
8%
REQUIREMENT: Prepare the journal entries to account the sale and leaseback transaction on both books of the
seller-lessee and buyer-lessor
MULTIPLE CHOICE (THEORIES)
1. Which of the following is not one of the criteria when determining whether a contract is or contains a lease?
A. Identified asset
B. Identified liability
C. Right to obtain substantially all of the economic benefits from use of an identified asset throughout the
period of use.
D. Right to direct the use of the identified asset throughout the period of use.
2. In relation to PFRS 16, which of the following statements is false?
A. A portion of an asset being leased is an identified asset if it is physically distinct.
B. An underlying asset is not considered an identified asset for the purpose of applying the accounting
requirements of PFRS 16 if the supplier’s substitution rights is not substantive.
C. The current view on accounting for leases by lessees is that all leases are “on-balance sheet” items, with
very minimal exceptions.
D. Lease term includes periods covered by an option to extend the lease if the lessee is reasonably certain to
exercise that option.
3. According to PFRS 16, lease payments exclude which of the following?
(1) Purchase option that is unreasonably certain to exercise.
(2) Fixed amount of rentals
(3) Amounts expected to be payable by the lessee under residual value guarantees
(4) Cost for services and taxes paid by the lessee
A. 1 and 3 C. 2 and 4
B. 2 and 3 D. 1 and 4
4. In relation to PFRS 16, determine the correct statement.
A. Short-term lease is defined as twelve-month or less lease with a purchase option.
B. In relation to low-value lease, the value of an underlying asset is based on the value of the asset when
new regardless of the age of the asset.
C. A right of use asset is measured initially and subsequently at cost.
D. The discount rate used by the lessee in accounting for leases is interest rate implicit in the lease or lessee’s
incremental borrowing rate whichever is higher.

5. S1: Initial direct costs incurred by a lessee are expensed immediately.

S2: Initial direct costs are included to both the carrying amount of liability and asset.
S3: The right of use asset is generally reported within the non-current asset section as a separate line item.
A. True, false, false C. False, false, true
B. False, true, true D. True, false, true
6. The lessee’s liability for a finance lease would be periodically reduced by
A. Lease payment plus the depreciation of the asset.
B. Lease payment less the depreciation of the asset.
C. Lease payment less the portion allocable to interest.
D. Lease payment
7. The lessor should report the leased asset under an operating lease and income therefrom as which of the
following?
A. The asset should be kept off the statement of financial position and the lease income should go to reserves.
B. The asset should be kept off the statement of financial position and the lease income should go to the
income statement.
C. The asset should be reported in the statement of financial position according to its nature and the lease
income should go to reserves.
D. The asset should be reported in the statement of financial position according to its nature and the lease
income should go to the income statement.
8. Lease bonus under the operating lease
A. is amortized to income using the effective interest method.
B. is initially treated as unearned rent by a lessor.
C. is treated as an outright gain by a lessor.
D. is recognized in profit or loss over the remaining lease term using a very complex formula.
9. Which condition would require lease capitalization?
A. The lease does not transfer title to the lessee.
B. There is an uncertain purchase option.
C. The present value of the lease payments is significantly more than the fair value of the asset.
D. The lease term is below the useful life of asset.
10. Net investment in the lease is equal to the
A. Gross investment in the lease plus unearned finance income
B. The present value of lease payments less the present value of any unguaranteed residual value
C. The present value of the lease payments.
D. The present value of lease payments plus the present value of any unguaranteed residual value.
11. Where there is a lease of land and building and the title to the land is not transferred, generally the lease is
treated as if
A. The land is finance lease and the building is a finance lease.
B. The land is an operating lease and the building is a finance lease.
C. The land is a finance lease and the budding is an operating lease.
D. The land is an operating lease and the building is an operating lease.
12. Initial direct cost incurred by a lessor in a sales type lease shall be
A. Charged to cost of sales in the first period of the lease term.
B. Deferred and allocated over the lease term on a straight line basis.
C. Charged to unearned interest income in the first period of the lease term.
D. Deferred and allocated over the lease term in proportion to the recognition of rent revenue.
13. Which of the following statements characterizes a sales type lease?
A. The lessor recognizes only interest revenue over the life of the asset.
 B. The lessor recognizes only interest revenue over the lease term.
C. The lessor recognizes a dealer's profit at lease inception and interest revenue over the lease term.
D. The lessor recognizes a dealer's profit at lease inception and interest revenue over the life of the asset.
14. In a sale and leaseback transaction, which of the following statements is incorrect?
S1: If the transfer qualifies as a sale under PFRS 15, the seller-lessee shall measure the right-of-use asset
arising from the leaseback at the proportion of the previous carrying amount of the asset that relates to the
right of use retained by the seller-lessee and recognize only the amount of any gain or loss that relates to
the rights transferred to the buyer-lessor
S2: If the transfer does not qualify as a sale, the parties shall account for it as a financing transaction.
A. S1 only C. Both statements
B. S2 only D. None from the statements