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Accounting 3332 > Chapter 21: Accounting for Leases > Flashcards

Chapter 21: Accounting for Leases Flashcards

1
Q

What are the advantages of leasing transactions?

A
  • Off-Balance-Sheet Financing
  • Facilitates Asset Acquisition
  • Reduce risk of obsolescence
  • Less costly financing
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2
Q

What do we want to do when we facilitate asset acquisitions?

A
  • we want to overcome cash flow problems

- fear of obsolescesces

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3
Q

Who are the parties in a leasing transaction?

A
  • lessee (renter)

- lessor (owner)

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4
Q

The lessee is classified as what?

A
  • operating lease

- capital lease

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5
Q

The lessor is classified as what?

A
  • operating lease
  • direct financing lease
  • sales-type lease
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6
Q

For the lessee to consider a capital lease, it must meet how many criterias?

A

one

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7
Q

To be considered as a capital lease, one of these criterias have to be met by the lessee.

A
  • 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
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8
Q

How many criterias does the lessor have to meet to classify a lease as a capital lease?

A

two

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9
Q

What are the two conditions that have to be met by the lessor to be considered as a capital lease?

A
  • collectibility of lease payments reasonably predictable

- performance by the lessor is substantially complete

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10
Q

If a lease does not meet the four criterias, it is consided to be what type of lease?

A

operating lease

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11
Q

In operating leases what four options occur?

A
  • 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)
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12
Q

In periodic rental payments what does the lessee and the lessor recognize?

A
  • rent expense (lessee)

- unearned revenue (lessor)

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13
Q

What type of lease is it if it includes “Transfers ownership” to the lessee (substance over form)?

A

capital lease

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14
Q

In a capital lease, what does the lessee record?

A

the lessee records a lease asset & liability = to PVMLP

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15
Q

Under the Net Method in a capital lease, the lessor will set up a…

A
  • lease receivable = PVMLP

- remove the asset from the books

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16
Q

Interest on capital leases (liability side)…

A
  • 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
17
Q

In a capital lease, who records depreciation?

A

the lessee

18
Q

How does the lessee record the depreciation of the asset?

A
  • usually over the lease term, or

- the asset’suseful life if criteria 1 or 2 are met

19
Q

What are the bargain purchase options in a capital lease?

A
  • 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
20
Q

What are the classifications of a capital lease for the lessor?

A
  • direct financing

- sales type lease

21
Q

In the Direct Financing classification of a capital lease, when is profit not recognized?

A

if the lessor is NOT Manufacturer/Dealer

22
Q

In Sales Type Lease classification of a capital lease, the lessor is who?

A

the manufacturer/Dealer

23
Q

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?

A

Sale-Type Lease

24
Q

Journal entries for the Sale of Goods in Direct Financing?

Sales - COGS = GP

A

Dr. A/R
Cr. Sales

Dr. COGS
Cr. Inventory

25
Q

Journal enteries for the Sale of Goods in Sales-Type Lease?

Sales - COGS = GP
or
PVMLP - MfR Cost = GP

A

Dr. lease receivable (PVMLP)
Cr. Sales

Dr. COGS (MfR cost)
Cr. Asset

26
Q

Other lease accounting issues are…

A
  • executory costs
  • discount rate
  • financial statement disclosure requirements
  • Sale-Leaseback transactions
27
Q

What type of costs are considered executory costs?

A
  • maintenance
  • insurance
  • taxes
  • other costs assoicated with ownership
28
Q

The executory costs are usually expensed as they are incurred by who?

A

lessee

29
Q

The executory costs are excluded from MPL calculations if who retains responsibility?

A

lessor

30
Q

With discount rate, the lessee uses the SMALLER of…

A
  • rate implicit in lease or

- lessee’s own incremental borrowing rate

31
Q

What are financial statement disclosure requirements?

A
  • a “general description” of the leasing arrangement
  • gross amount of assets categorized by nature
  • future minimum lease payments, in the aggregate, and for each of the five succeeding fiscal years (operating anad capital leases)
  • other disclosures are specific to the type of lease (i.e. residual values, contingent rentals, subleases, and executory costs)
  • example: illustrations 21-32 and 21-32
32
Q

In the sale-leaseback transaction, there are 2 transactions that take place which are…

A
  • the owner of the asset sells it (transaction 1) and immediately leases it back (transaction 2) from the new owner
  • Capital lease
  • operating lease
33
Q

The gain on sale is deferred as a contra lease asset account and amortized against depreciation expense.

A

captital lease in the sale leaseback transaction

34
Q

The gain on sale is deferred as a liability and amortized against rent expense.

A

operating lease in the sale leaseback transaction

35
Q

When are all the losses recognized in a Sale-Leaseback transaction?

A

immediately

36
Q

In a Sale-Leaseback transaction, what is the journal entry for the sale of PPE?

A

Dr. Cash
Dr. Accumulated Depreciation
Dr./Cr. Loss/gain on sale of asset
Cr. PPE (Historical Cost)

Accounting 3332 (10 decks)

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