Chapter 21: Accounting for Leases Flashcards
(36 cards)
What are the advantages of leasing transactions?
- Off-Balance-Sheet Financing
- Facilitates Asset Acquisition
- Reduce risk of obsolescence
- Less costly financing
What do we want to do when we facilitate asset acquisitions?
- we want to overcome cash flow problems
- fear of obsolescesces
Who are the parties in a leasing transaction?
- lessee (renter)
- lessor (owner)
The lessee is classified as what?
- operating lease
- capital lease
The lessor is classified as what?
- operating lease
- direct financing lease
- sales-type lease
For the lessee to consider a capital lease, it must meet how many criterias?
one
To be considered as a capital lease, one of these criterias have to be met by the lessee.
- transfer of title to lease
- there is a bargain purchase option
- lease term >= to 75% of the asset’s useful life
- the present value of minimum lease payment (PVMLP) >= to 90% of the asset’s fair vaule
How many criterias does the lessor have to meet to classify a lease as a capital lease?
two
What are the two conditions that have to be met by the lessor to be considered as a capital lease?
- collectibility of lease payments reasonably predictable
- performance by the lessor is substantially complete
If a lease does not meet the four criterias, it is consided to be what type of lease?
operating lease
In operating leases what four options occur?
- leases not meeting one of the four criteria
- ownership is retained by the lessor
- periodic rental payments
- advanced payments classified as prepaid rent (lessee) and unearned rent (lessor)
In periodic rental payments what does the lessee and the lessor recognize?
- rent expense (lessee)
- unearned revenue (lessor)
What type of lease is it if it includes “Transfers ownership” to the lessee (substance over form)?
capital lease
In a capital lease, what does the lessee record?
the lessee records a lease asset & liability = to PVMLP
Under the Net Method in a capital lease, the lessor will set up a…
- lease receivable = PVMLP
- remove the asset from the books
Interest on capital leases (liability side)…
- accrues at effective rate * outstanding balance
- rent payment (except usually the first) have an interest component and a residual portion
- interest must be accrued at each financial statement
In a capital lease, who records depreciation?
the lessee
How does the lessee record the depreciation of the asset?
- usually over the lease term, or
- the asset’suseful life if criteria 1 or 2 are met
What are the bargain purchase options in a capital lease?
- viewed as an additional cash flow for both the lessor and the lessee
- lessee: adds present value of BPO to the lease asset/liability
- lessor: subtracts present value of BPO from the fair market value to determine the amount of periodic lease payments
What are the classifications of a capital lease for the lessor?
- direct financing
- sales type lease
In the Direct Financing classification of a capital lease, when is profit not recognized?
if the lessor is NOT Manufacturer/Dealer
In Sales Type Lease classification of a capital lease, the lessor is who?
the manufacturer/Dealer
What type of capital lease classification records gross profict (GP = Rev (PVMLP) - COGS (Manufacturer’s cost)) & All subsequent enteries are the same, only difference occurs at inception?
Sale-Type Lease
Journal entries for the Sale of Goods in Direct Financing?
Sales - COGS = GP
Dr. A/R
Cr. Sales
Dr. COGS
Cr. Inventory
