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Financial Accounting || - MGT 401 - Graded Discussion Board (GDB)No 2 -Solution - Due Date :17 July 2014

Learning Objectives:

Objective of this discussion is to enable students to get in depth knowledge of different types of leasing. Real time scenarios are developed to distinguish the differentiate types of leasing according to nature and types of agreement.

Learning outcomes:

After this valuable discussion students will be able to compare, distinguish and relate two major types of leasing and able to understand nature of agreement that is necessary to declare an agreement as a leasing agreement.

(A) Firdous limited is intended to acquire an asset for one season that is consisted of 6 months. Hefty amount is needed to acquire the asset so, company decided to acquire it on lease. After six month period, leasing agreement will be expired without any possession.

(B) PK Plus limited acquire asset on lease from Damas leasing company. PK plus has an option to purchase the asset at end of lease term, on below its fair price.

(C) Admiral limited got an asset on lease. According to the expert the economic useful life of asset is not more than 12 years. Whereas, term of lease is for 10 years. Furthermore, company has no intention to purchase the asset at the end of lease term.

(D) Pine Corporation acquired an asset on lease without intention to purchase it at expiry of series of rental payments. Fair value of asset is Rs.100,000 and rental payment is Rs.80,000.

Requirement: From above given scenarios identify types of lease with proper reasoning.

2. Jade company Ltd. acquired an assets form its associated company BBG. Jade company will use the asset for 6 year and will pay monthly installments to BBG
Requirement: Is this agreement is lease agreement? Discuss.

Important Instructions:

1. The GDB will remain open for 3 working days/ 72 hours.

2. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.

3. Obnoxious or ignoble answer should be strictly avoided.

4. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.

For Detailed Instructions please see the GDB Announcement

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Replies to This Discussion

mgt 401 gdb idea soul

A. Operating Lease

An operating lease is basically a rental agreement. The lessee records rent expense for each of the lease payments.
B. Capital Lease

A capital lease is a rental agreement in form, but the substance of the transaction is an asset purchase. With capital leases, the lessee records and asset and related liability rather than rental expense. The lessee also record depreciation on the asset. If a lease agreement meets any one of the following criteria, it is considered to be a capital lease:

The lease term is equal to 75% or more of the life of the asset.
The present value of the minimum lease payments is equal to at least 90% of the cost of the asset.
The lease transfers ownership of the asset to the lessee at the end.
The lease contains a bargain purchase option (the option price is so low we know that the lessee will exercise the option to purchase the asset.

(A)Operating Leases
amounts of minimum lease payments at balance sheet date under noncancellable operating leases in the aggregate and for:
the next year
years 2 through 5 combined
beyond five years
contingent rent recognised as in income
general description of significant leasing arrangements

(B)Finance Leases
reconciliation between gross investment in the lease and the present value of minimum lease payments;
gross investment and present value of minimum lease payments receivable for:
the next year
years 2 through 5 combined
beyond five years
unearned finance income
unguaranteed residual values
accumulated allowance for uncollectible lease payments receivable
contingent rent recognised in income
general description of significant leasing arrangements
Objective of IAS 17

The objective of IAS 17 (1997) is to prescribe, for lessees and lessors, the appropriate accounting policies and disclosures to apply in relation to finance and operating leases.

IAS 17 applies to all leases other than lease agreements for minerals, oil, natural gas, and similar regenerative resources and licensing agreements for films, videos, plays, manuscripts, patents, copyrights, and similar items. [IAS 17.2]

However, IAS 17 does not apply as the basis of measurement for the following leased assets: [IAS 17.2]

property held by lessees that is accounted for as investment property for which the lessee uses the fair value model set out in IAS 40
investment property provided by lessors under operating leases (see IAS 40)
biological assets held by lessees under finance leases (see IAS 41)
biological assets provided by lessors under operating leases (see IAS 41)

Classification of leases

A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. All other leases are classified as operating leases. Classification is made at the inception of the lease. [IAS 17.4]

Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form. Situations that would normally lead to a lease being classified as a finance lease include the following: [IAS 17.10]

the lease transfers ownership of the asset to the lessee by the end of the lease term
the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than fair value at the date the option becomes exercisable that, at the inception of the lease, it is reasonably certain that the option will be exercised
the lease term is for the major part of the economic life of the asset, even if title is not transferred
at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset
the lease assets are of a specialised nature such that only the lessee can use them without major modifications being made.
my solution is rite or nt???

tell some aboput 2nd question plzzz

Q 2.

In real life lease agreements are of 3 to 7 years duration, so this is lease agrement.

the lease agreements have the option for purchase of the assets at the
end of the lease period. There are no financial restrictions in the lease agreements.

1   a)  operating 

      b) finance 

      c) operating

      d) finance


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