Name: Mahusay, Jeth A.

Date: March, 2021

Year: BSA-3 Instructor:Ms. Anna Mae Magbanua, CPA
Subject: Intermediate Accounting 2

MODULE 1
Scenario 1
Maxine is waiting to hear back on your conclusion as to whether the rental
agreement signed by Ezy-Equip is a lease and why. You will need to refer to
the extracts of the office rental agreement that Peter has sent you to answer
this question.
The rental agreement is [a lease; not lease] because:
 The office space [is; is not] an identified asset explicitly stated in the
agreement,
 Ezy-Equip has the right to obtain [some of; the majority of; substantially
all of] the economic benefits from the use of the office space because it
 [has exclusive use; has ownership] of the office space, and
 Ezy-Equip has the right to direct the [ ownership; use] of the premises
because it has the right to [terminate the agreement earlier than the lease
term.; make all relevant decisions about its use.]

What is the lease term of Ezy-Equip’s office lease? Refer to the lease
agreement below to help you answer this question. Read also the email
(previous page) from Peter for additional details on the lease agreement.
A. 7 years, with a commencement date of March 1, 2016.
B. 10 years, with a commencement date of February 1, 2016.
C. 15 years, with a commencement date of February 1, 2016.
D. 15 years, with a commencement date of March 1, 2016

You draft up an email ready to send to Peter.

The agreement is [a lease.; not a lease.]
This is due to:
 The trucks are [not an identified asset; an identified asset] because Ezy-
Trucks has a large pool of similar trucks that can be used to fulfil the
requirements of the contract.
 York Building [does not have the right to obtain the economic benefits; has
the right to obtain the economic benefits] from the use of the trucks because
the contract specified the nature and quantify of the goods to be
transported.
 Ezy-Trucks [directs the use of the trucks; does not direct the use of the
trucks] because Ezy- Trucks can select which trucks are used for each
delivery and the trucks are stored at Ezy- Truck’s premises when not being
used.
Scenario 2
You realize the commencement date of the lease agreement is coming up
soon, and think that Peter may ask you about the accounting for the lease
on initial recognition. First, you decide to look at how to measure the lease
liability under IFRS 16.
How should Ezy Equip’s lease liability be measured on initial recognition?
A. Total value of lease payments plus expected penalty fee
B. Total value of lease payments
C. Initial direct costs plus present value of lease payments
D. Present value of lease payments
Next, you determine the need to measure the right-of-use asset.
How should Ezy-Equip’s right-of-use asset be measured on initial
recognition?
A. Initial measurement of the lease liability, plus initial direct costs
B. Initial measurement of the lease liability, less initial direct costs
C. Initial measurement of the lease liability, less depreciation expense for
the period
D. Initial measurement of the lease liability only
What journal entries are required to record Ezy-Equip’s lease contract on
initial recognition? Read again the Ezy-Equip’s office lease contract.
Dr Right-of-use asset A. $1,848,847
Cr Lease Liability B. $1,648,847
Cr Cash (lease payment) C. $200,000
Recording the right-of-use asset and lease liability at inception at the
present value of lease payments over the lease term
Dr Right-of-use asset D. $3,000
Cr Cash (initial direct costs) E. $3,000

Show your solution. At the end of Year 1, what is the carrying amount of the
right-of-use asset and lease liability of Ezy Equip?
Statement of Financial Position
1. Carrying amount of the right-of-use asset?
(Right-of-use asset – Depreciation on the right-of-use asset)
($1,851,847 – $123,456) = $1,728,391
2. Carrying amount of the lease liability?
(Lease Liability + Interest on the least liability)
($1,648,847 + $131,908) = $1,780,755
Carrying amount of the lease liability
1. Depreciation of the right-of-use asset?
Right-of-use asset / 15
($3,000 + $1,848,847) / 15 = $123,456
2. Interest on the lease liability?
(Lease Liability * Discount Rate)
($1,648,847 * 0.08) = $131,908
3. How would Ezy-Equip classify cash flows for the payment of the principal
portion of the lease liability?
A. Financing activities
B. Operating activities
C. Investing activities
D. It is an accounting policy choice
Whilst you understand that the office lease would not meet the low value or
short-term exemption, you believe Peter may ask how cash flows would be
classified if the recognition exemption is applied in the case of another lease
contract.

4. How would you classify the cash flows for short-term or low-value asset
leases?
A. Financing activities
B. Operating activities
C. Investing activities
D. It is an accounting policy choice

Scenario 3
Peter has determined that the contract is a finance lease.
Which of the following is one of the features of the contract that supports
Peter’s conclusion of classifying the lease as a finance lease but it is not
relevant?
(Note: The answer options below are not an exhaustive list of indicators that
support the lease’s classification as a finance lease)
A. Fair value fluctuations
B. Secondary rentals
C. Ownership
D. Specialized asset
You have helped Peter to confirm that the contract is a finance lease. Now
he asks you to help him in calculating the net investment in the lease.
The first step is to identify which payments made by Construworks to Ezy-
Trucks are relevant for inclusion the calculation of the net investment in the
lease.
Which of the following are included in the measurement of the net
investment of the lessee?
A. Annual fixed payments of $16,500
B. Annual fixed payments of $6,000
C. Annual Fixed rent payments of $6,000, annual rent payments for the two-
year lease extension of $500 and the unguaranteed residual amount of
$1,500
D. Annual fixed rent payments of $6,000 and the annual rent payments for
the two-year lease extension of
Peter has asked for your help to determine the amount initially recognized
for the lease. What are the journal entries required Ezy-Trucks at the
inception of the lease?
On initial recognition, Ezy-Trucks records:
Dr Lease receivable [$21,834; $23,837; $23,455; $26,468]
Cr Property, plant and equipment [$21,834; $23,837; $23,455; $26,468]
You have helped Peter to confirm that the contract is a finance lease. Now
he asks you to help him in calculating the net investment in the lease.
The first step is to identify which payments made by Construworks to Ezy-
Trucks are relevant for inclusion the calculation of the net investment in the
lease.
Which of the following are included in the measurement of the net
investment of the lessee?
A. Annual fixed payments of $16,500
B. Annual fixed payments of $6,000
C. Annual Fixed rent payments of $6,000, annual rent payments for the two-
year lease extension of $500 and the unguaranteed residual amount of
$1,500
D. Annual fixed rent payments of $6,000 and the annual rent payments for
the two-year lease extension of $1,000
Peter has asked for your help to determine the amount initially recognized
for the lease.
What are the journal entries required Ezy-Trucks at the inception of the
lease?
On initial recognition, Ezy-Trucks records:
Dr Lease receivable [$21,834; $23,837; $23,455; $26,468]
Cr Property, plant and equipment [$21,834; $23,837; $23,455; $26,468]
You’ve helped Peter determine the net investment in the lease at initial
recognition. But Peter returns with another question. Peter asks you to
explain the subsequent measurement for the same lease, specifically what
journal entries he should post at the end of the first year of the lease.
What journal entries should be posted at the end of the first year of the
lease?
DR Cash [$0; $5,000; $6,000; $6,500]
CR Lease receivables [$0; $5,072; $5,420; $5,500]
CR Finance income [$0; $500; $928; $1,080]
CR Other income [$0; $50; $500; $1,000]
Peter now understands the accounting treatment of finance leases by
lessors. Peter asks you to explain what the the accounting treatment would
be if the lease had been classified as an operating lease.
What journal entries would be processed by Ezy-Trucks at the end of the
first year of the lease relating to the recognition of lease income?
DR Lease receivables [$0; $6,000; $6,500; $500]
CR Accrued lease income [$0; $1,833; $2,043; $2,057]
CR Lease income [$0; $4,167; $4,457; $4,443
CR Other income [$0; $6,000; $6,500; $500]
If the lease had been classified as an operating lease, there would also be
additional journal entries to be recorded at the end of the first year of the
lease.
What journal entries would be processed by Ezy-Trucks at the end of the
first year of the lease relating to the recognition of lease payments received
and depreciation on the truck?
DR Cash [$0; $6,000; $6,500; $500]
CR Lease receivables [$0; $6,000; $6,500; $500]
Recognizes lease payments received.
DR Depreciation Expense [$0; $2,997; $3,489; $3,973]
CR Accumulated depreciation [$0; $2,997; $3,489; $3,973]

Scenario 1: Identifying a Lease

You read through the agreement details provided to see whether there is an
identified asset, focusing on determining whether Ezy-Construct has
substantive substitution rights over the bulldozers.
Does Ezy-Construct have substantive substitution rights over the bulldozers?
A. Yes, because Ezy-Construct will economically benefit from the exercise of
its right to substitute the bulldozers
B. Yes, because Ezy-Construct can generate additional economic benefits
from the bulldozers as specified in the contract when they are not in use by
Hillbank and stored at Ezy-Construct’s premises
C. No, because Ezy-Construct does not have the practical ability to
substitute alternative bulldozers throughout the period of use
D. No, because Ezy-Construct does not have ownership over the bulldozers
You have determined that the bulldozers hired out by Ezy-Construct are
identified assets because they are explicitly identified in the contract, and
that Ezy-Construct does not have substantive substitution rights for these
assets.
Your next step, as part of the determination of whether the contract contains
a lease, is to assess whether Hillbank Engineering (lessee), has the right to
obtain substantially all of the economic benefits from the use of the
bulldozers throughout the period of use.
The contract has a [defined scope; clause; condition], which [permits;
restricts; either permits or restricts] Hillbank Engineering from using the
bulldozers on any other project apart from the demolition and reconstruction
of the Royal Elizabeth Hospital. However, Hillbank Engineering [has; does
not have; neither] the right to obtain substantially all of the economic
benefits from the use of the bulldozers because it has [restrictive; exclusive;
inclusive] use of them throughout the lease period, within the [defined
scope; clause; condition]
Your next step is to determine whether Hillbank Engineering has the right to
direct the use of the bulldozers.
Hillbank Engineering [has; does not have; may have] the right to direct the
use of the bulldozers throughout the period of use.
This is because:
 All the relevant [rights; decisions; power] regarding the use of the
bulldozers are explicitly stated in the contract so it can be concluded
that the relevant decisions about how and for what purpose the
bulldozers are used are [predetermined; flexible; not explicitly
stated], and
 Hillbank Engineering has the right to [change; operate; use] the
bulldozers within the defined scope throughout the period of use but
Ezy-Construct does not have the [option; right; power] to change the
use and operating instructions.
You email Leonard and let him know the criteria for determining a lease and
that based on the facts given in the contract, you believe the contract
contains a lease.
You email Leonard and let him know the criteria for determining a lease and
that based on the facts given in the contract, you believe the contract
contains a lease.
Under what circumstances could Hillbank, the lessee, elect to use the
practical expedient?
A. Hillbank can elect to use the practical expedient by class of underlying
asset and account for lease and non-lease components as a single
component.
B. Hillbank can elect to use the practical expedient on a lease-by-lease
basis and account for lease and non-lease components as a single
component.
 C. Hillbank can only elect to use the practical expedient for leases where
the non-lease component is not significant and account for the non-
lease components separately.
D. Hillbank can only elect to use the practical expedient for leases where
the stand-alone value of the non-lease component is not readily
available and account for the non-lease components

Scenario 2: Lessees
Leonard asks what period Ezy-Tools should recognize as the lease term?
A. Two years
B. Four years, and reassess at the end of the non-cancellable period of
the lease.
C. Four years
D. It depends. There isn’t enough information to determine whether a
reassessment is required at the end of the non-cancellable.
Leonard continues to ask questions about the motor vehicle lease. Leonard
mentions that he is not able to determine the initial direct costs incurred by
the lessor.
What discount rate should Ezy-Tools be using to calculate the present value
of the lease payments?
A. Interest rate implicit in the lease
B. Market borrowing rate
C. Lessor’s incremental borrowing rate
D. Lessee’s (Ezy-Tool’s) incremental borrowing rate.
Leonard mentions that costs relating to the lease have been incurred and he
is uncertain what the appropriate accounting treatment for these costs is.
You explain to him that for Ezy-Tools as a lessee, any initial direct costs are
included in the initial measurement of the right-of-use assets.
Leonard rattles off a list of costs incurred, but you explain to Leonard not all
would meet the definition of initial direct costs.
The costs mentioned by Leonard include:
 Commissions
 Legal fees
 General overheads
 Payments made to existing tenants to obtain the lease
Which of the above costs are initial direct cost?
A. Commissions and legal fees
B. Commissions, legal fees, general overheads
C. Commissions, legal fees, payments made to existing tenants to obtain
lease
D. Legal fees only
Leonard quickly chimes in and says he has one last question for you
regarding the motor vehicle lease.
In the contract, an additional payment of $1,000 for every 10,000 miles a
vehicle is driven over 50,000 miles is payable to the lessor. Leonard
mentioned that he doesn’t know whether the sales representatives will drive
over 50,000 miles and isn’t sure what the accounting impact would be
should they do so – but he would like some clarification.
What is the accounting treatment for this variable payment?
A. The variable payment is included in calculating the lease liability
because it meets the definition of variable lease payment.
B. The variable payment is included in calculating the lease liability as it
is implicitly stated in the contract.
C. The variable payment is excluded in calculating the lease liability
because Leonard is not reasonably certain as to whether the sales
representatives will drive over 50,000 miles
D. The variable payment is excluded in calculating the lease liability and
should be recognized in the profit or loss when incurred in the period
in which the event or condition that triggers those payments occur.
Scenario 3: Lessors – Classification and Measurement
You have obtained the following information from Leonard which was
relevant at the commencement date of the lease of the bulldozers to
Hillbank:
 The estimated useful life of the bulldozer is five years.
 The interest rate implicit in the lease could not be readily determined.
Leonard has advised that Ezy-Construct’s incremental borrowing rate
is 11%. The present value of the lease payments is $685,009.
 The bulldozer’s fair value is $750,000, with no residual value.
How should Ezy-Construct (as a lessor) classify the lease? You may refer on
the lease contract AGREEMENT NUMBER: PRO-983
A. The lease is a finance lease
B. The lease is an operating lease.
C. The lease is either a finance or an operating lease, this is an accounting
policy choice
D. There is not enough information to determine the classification of the
lease.
In Year 2, Ezy-Construct and Hillbank decide to modify the scope of the
bulldozer lease agreement by adding an additional bulldozer to the
agreement. The consideration for the lease increases by an amount
commensurate with the stand-alone price for the increase in scope.
How would Ezy-Construct treat this lease modification to its existing finance
lease?
A. Adjust the right-of-use asset
B. Adjust the right-of-use asset and recognize a gain or loss
C. Apply the requirements of IFRS 9 Financial Instruments
D. Account for the modification as a separate lease.
You are helping Leonard to determine the appropriate accounting treatment
for the sublease, which has been classified as a finance lease.
Which of the following accounting treatments would be applied on the
commencement date of the sublease?
Indicate whether Yes or No.
1. Derecognize the right-of-use asset relating to the head lease that is
transferred to the sub-lessee. Yes
2. Derecognize the right-of-use asset relating to the head lease. No
3. Recognize the net investment in the sublease. Yes
4. Recognize the difference between the right-of-use asset and the net
investment in the sublease in profit or loss. Yes
5. Retain the lease liability relating to the head lease in its Statement of
Financial Position. Yes

Ezy-Construct is considering selling their equipment warehouse to a third

party and leasing it back. Leonard has asked what the accounting impact
would be as a result of a sale and leaseback arrangement on the assumption
that the transfer of the warehouse constitutes a sale in accordance with IFRS
15.
A. Recognize a right-of-use asset as an operating lease
B. Recognize the gain/loss on disposal of the right-of-use it has
transferred
C. Recognize a right-of-use asset for the right-of-use it has retained
D. Recognize a right-of-use asset for the right-of-use it has retained and
recognize the gain/loss on disposal of the right-of-use it has
transferred