Chapter 21: Leases Flashcards
What are some advantages of a lease to a lessee?
Advantages of leasing – Lessee
- 100% financing at fixed rates
- Protection against obsolescence
- Flexibility
- Less costly financing
What are some advantages of a lease to a lessor?
- Profitable interest margin
- Stimulate sales
- Tax benefits
- High residual value to the lessor
————————– BACKGROUND —————————–
Assume:
- LESSEE
- FINANCE LEASE
————————– Question ————————————–
What accounts within the “BALANCE SHEET” are used?
(1) Right-of-use Asset
(2) Lease Liability
————————– BACKGROUND —————————–
Assume:
- LESSEE
- FINANCE LEASE
————————– Question ————————————–
What line items within the “INCOME STATEMENT” are impacted?
(1) Amortization Expense
(2) Interest Expense
————————– BACKGROUND —————————–
Assume:
- LESSEE
- OPERATING LEASE
————————– Question ————————————–
What accounts within the “BALANCE SHEET” are used?
(1) Right-of-use Asset
(2) Lease Liability
————————– BACKGROUND —————————–
Assume:
- LESSEE
- OPERATING LEASE
————————– Question ————————————–
What line items within the “INCOME STATEMENT” are impacted?
Lease Expense
————————– BACKGROUND —————————–
Assume:
- LESSOR
- FINANCE LEASE
————————– Question ————————————–
What line items within the “BALANCE SHEET” are impacted?
- Lease Receivable, separate from other assets
- De-recognize the leased asset
————————– BACKGROUND —————————–
Assume:
- LESSOR
- OPERATING LEASE
————————– Question ————————————–
What line items within the “BALANCE SHEET” are impacted?
- Continue to recognize assets subject to operating leases as PP&E
————————– BACKGROUND —————————–
Assume:
- LESSOR
- FINANCE LEASE
————————– Question ————————————–
What line items within the “INCOME STATEMENT” are impacted?
- Interest Revenue
- Selling Profit or Loss
————————– BACKGROUND —————————–
Assume:
- LESSOR
- OPERATING LEASE
————————– Question ————————————–
What line items within the “INCOME STATEMENT” are impacted?
- Revenue (generally recognized on a straight-line basis)
- Depreciation expense (on the leased asset)
What are the five tests used to determine lease classification?
Lease classification – Five tests
1. Transfer of ownership test
Does the lease transfer ownership of the underlying asset to the lessee by the end of the
lease term?
- Purchase option test
Does the lease grant the lessee an option to purchase the underlying asset that is the lessee is reasonably certain to exercise? - Lease term test
Is the lease term for a major part of the remaining economic life of the underlying asset? - Present value test
Does the present value of the sum of (1) the lease payments, (2) any lessee residual value
guarantee not reflected in the lease payments equal or exceed substantially all of the underlying asset’s fair value? - Alternative use test
Is the underlying asset of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term?
When determining the lease classification, if any of the answers to the question is _____, then the lease is classified as a _________ lease.
If the answer to any question is yes, then the lease is classified as a financing lease.
If the answer to all questions is no, then the lease is classified as an operating lease.
————————- BACKGROUND————————–
Assume:
- Financing Lease
- Lessee
——————————-Q1—————————————
What are the start of lease set of journal entries?
——————————-Q2—————————————
What are the lease payment set of journal entries?
——————————-Q3—————————————
What are the end of accounting period set of journal entries?
——————————-Q1—————————————
Dr. Right-of-Use Asset…PV(expected payments)
Cr. Lease Liability…………PV(expected payments)
——————————-Q2—————————————
Dr. Lease Liability…………Payment
Cr. Cash………………………..Payment
——————————-Q3—————————————
Dr. Interest Expense……..r * Book value of Liability
Cr. Lease Liability…………..r * Book value of Liability
Dr. Amortization Expense…amortization amount (often SL)
Cr. Right-of-Use Asset………amortization amount (often SL)
————————- BACKGROUND————————–
Assume:
- Financing Lease
- Lessor
——————————-Q1—————————————
What are the start of lease set of journal entries?
——————————-Q2—————————————
What are the lease payment set of journal entries?
——————————-Q3—————————————
What are the end of accounting period set of journal entries?
——————————-Q1—————————————
Dr. Lease Receivable..PV(expected payments + residual)
Cr. Sales Receivable…PV(expected payments + residual)
Dr. COGS…………………Cost of Asset
Cr. Inventory…………….Cost of Asset
——————————-Q2—————————————
Dr. Cash……………………….Payment
Cr. Lease Receivable….Payment
——————————-Q3—————————————
Dr. Lease Receivable……..r * Book value of Receivable
Cr. Interest Revenue………r * Book value of Receivable
————————- BACKGROUND————————–
Assume:
- Operating Lease
- Lessee
——————————-Q1—————————————
What are the start of lease set of journal entries?
——————————-Q2—————————————
What are the lease payment set of journal entries?
——————————-Q3—————————————
What are the end of accounting period set of journal entries?
——————————-Q1—————————————
Dr. Right-of-Use Asset…PV(expected payments)
Cr. Lease Liability…………PV(expected payments)
——————————-Q2—————————————
Dr. Lease Liability…………Payment
Cr. Cash………………………..Payment
——————————-Q3—————————————
Dr. Lease Expense……..Payment
Cr. Lease Liability…………..r * Book value of Liability
Cr. Right-of-use Asset……plug
