Leases

Question 1

What are the two types of leases?

Answer 1

Operating - basically a rental agreement ;; no transfer of ownership

Capital/finance - treated as a sale ;; transfers mostly all of the benefits and risks in ownership of property to the lessee

Question 2

Two types of capital leases

Answer 2

Sales type -

Direct financing lease -

Question 3

Annual rental revenue

Answer 3

=total rental revenue from the lease allocated over the full life of the lease

Rev = total cash/#years

Question 5

Nonrefundable lease bonus

Answer 5

-recognized over the life of the lease

Question 6

Lessee rent expense

Answer 6

DR. rent expense

CR. Cash/rent payable

Question 7

Lessor rental income

Answer 7

DR. Cash/rent receivable

CR. Rental income

Question 7

Amortization of leasehold improvements

Answer 7

Should be over the life of the improvements or the remaining life of the lease - whichever is shorter

Question 8

Lessee capital lease criteria (us gaap)

Answer 8

1 out of the 4 has to be met to capitalize (OWNS)

• ownership transfers at the end of the lease upon final payment or required buyout
• Written option for bargain purchase
• 90% rule (the present value of the lease payment is greater than 90% of the fair value of the leased property)
• 75%: the lease term is greater than 75% of the assets economic life

DR. Fixed asset-leased property
CR. Liability -obligation under cap lease

Question 9

Guaranteed residual value

Relating to a cap lease

Answer 9

Guaranteed residual value is an additional lease payment and must be included in the calculation of the present value of the minimum lease payments.

Question 10

What should lessors include in lease payments ?

Answer 10

Lessors (recording a lease receivable for direct financing) should include the minimum lease payments + any residual value

Question 11

Sales type leases

Answer 11

Profit on sale. Present value Of payments exceeds the lessors carrying value

FV > CV

Question 12

Direct financing leases

Answer 12

FV=CV

no profit just interest income

Question 13

Rule for direct financing lease

Answer 13

Present value =
Carrying amount of receivable=
Cost of asset sold

Question 14

Rule for sales type lease

Answer 14

Cost
+ profit
= present value = selling price=FV

Question 15

Sales type unearned interest revenue

Answer 15

PV at inception of lease 
- initial payment 
=balance first year
X interest rate 
= int. Rev. (12months)
X months (ex. 6/12 or divide by 2)
=int. Rev. Yr end

Question 16

For the lessee, the lease must meet 1 out of the 4 conditions to capitalize

Answer 16

O ownership trnsfrs @end of lease
W written option for bargain
purchase
N ninety 90% rule- if PV of lease payments is greater than or equal to 90% of the cash price
S seventyfive 75%rule- the lease term is 75% or more of the useful life of the leased asset

Question 17

Profit on sale

Answer 17

Present value of payments
- carrying cost
= profit on sale

Question 18

Depreciation expense on leases asset

Answer 18

Usually of the lower %

When a lease is capitalized because of transfer of title or bargain purchase, depreciation is based on the life of the asset, not the lease. The cost includes the bargain purchase price

(Cost - Estimated FV at end) / life

Question 19

Interest rate

Answer 19

When calculating the present value of the minimum lease payments -
Lessee uses the lower the
-rate implicit in the lease, if known
- or lessee’s incremental borrowing rate

Question 20

What are the components of the lease receivable for a lessor involved in a direct financing lease ?

Answer 20

The minimum lease payments plus residual value

Question 21

If title transfers after lease

Answer 21

Lessor does not depreciate only shows interest income.

Lessee depreciates and records interest rev

Question 22

Manufacturers or dealers profit

Answer 22

Cash selling price of equipment
- cost of equipment at inception
=profit recognized on sale

Question 23

Finance lease liability calculation

Answer 23

Lease payment x PV factor #
= FMV
- first payment
=lease liability

Question 24

Depreciation years

Answer 24

Should always be lesser of lease life or useful life
EXCEPT
If there is a bargain purchase option

Question 25

Sale-leaseback

Answer 25

When a company sells an asset and then leases it right back from the new owner.

Way to raise capital without issuing stock. Gets cash and then leases to continue use / operations. (Like a loan)

Question 26

Sales leaseback - GAAP long term lease rule

Answer 26

Greater than or equal to 90% of FV, cap.lease, gain = defer all &amortize

Question 27

Sales leaseback - GAAP in between term lease rule

Answer 27

<90% but >10%:cap or op.
Gain = defer gain up to PV of min lease pmts/cap asset
Recognize excess gain immediately

Gain-PV- defer
Exc. -now

Question 28

Sales leaseback - GAAP short term lease rule

Answer 28

PV of rent pmts is 10% or less of FV/ op.

Gain = recognize immediately