Chapter FAR-5: leases Flashcards Preview

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Flashcards in Chapter FAR-5: leases Deck (27):
1

What are the key concepts in handling the start date, payment date in recording interest expense/revenue?

If the payment date (payment made) on the same date as start date of debit/lease, then no interest expense/revenue is recorded

If the payment date (payment made) incurred after the start date of lease/debt (like 1 day later, 2 days later, 3 months later, on 12/31/year), then it's there interest expense/revenue is recorded.

2

What is the formula to calculate the present value of a

note receivable
lease
(perioidc payments on something)

??

Periodic payment (monthly, annual, etc)
x PV Factor
-------------------
= Present value


3

What is the formula to calculate the Future Value of an item?

$$ total amount invested (not payments)

x

1 / PV factor

= Future value

4

If the lessor leases out:

A capital lease >> what gets recognized?

An operating lease >> what gets recognized?

Lessor on:

Capital lease >> recognize interest income

Operating lease >> recognize rent income

FYI - capital lease does not recognize rent income.

5

What is the requirements to recognize a capital lease?

Have to meet one of the rules:

1) Transfer Title
2) Bargain purchase option (not fair value option)
3) 75%: lease life is 75% or above of useful life
4) 90%: Lease FV is 90% of PV payments

6

What is the requirements to recognize a Finance lease?

(IFRS rule)

1) Both the lessee and lessor classify a lease as a finance lease
2) And if the lease transfers substantially all the risks and rewards of ownership to the lessee.

For example: Lease FV is 88% of the PV payments.

7

How are the initial direct costs handled

under IFRS
and

under GAAP?

Under IFRS: Lessee's paid initial direct costs are ADDED back to the recognized amount on the Finance lease.

Under GAAP: Initial direct costs are NOT added to the PV value of the capital lease or added in the PV of payments.

They are reported separately on Income statement as expenses.

They are MINUS out of the Payments or the PV value on the capital lease.

8

What are the initial direct costs that are related to the

Finance lease (IFRS)
and
Capital lease (GAAP)

Initial direct costs = Executory costs.

This includes insurance property taxes, maintenance costs,



9

What is the difference between:

Bargain purchase option
and
Guaranteed residual value??

Bargain Purchase Option:
>> A small $$ value option to the lessee to purchase the lease asset at the end of the lease term.
>> Capital leases only have bargain purchase option.
Use the PV on the BPO along with the PV on the lease payments.

Guaranteed Residual Value:
>> Lessee's guaranteed $$ value amount on the asset to the Lessor at end of lease period. It's like a Salvage value at end of lease.

Lease obligation includes:
PV on this guaranteed residual value + PV on the lease payments

10

What is the rule on the minimum lease payments in regards to the

Implicit rate
and
Incremental borrowing rate?

If the lessee knows the implicit rate on a lease,

the Lessee calculates the PV on lease payments by picking smaller amount:

1) Implicit rate
or
2) Incremental borrowing rate

11

What is the rule on picking the life of leasedhold improvement asset for depreciation?

Rule: The lessee chooses the smaller amount:

Useful life or Lease Life for depreciation on leasehold improvements.

12

What is the rule on picking the life of leased asset for depreciation (when Transfer Title or Bargain Purchase Option is used)?

Since this is a capital lease (due to Transfer title or bargain purchase option),

Use the useful life of the capital lease asset to find DEPRECIATION EXPENSE.

Do NOT use lease life.

13

What is the accounting rule in regards to a period of free or reduced rent?

What is the journal entry to account for Free or Reduced rent (LESSOR SIDE)?

Rule: Rent amount (rent revenue)

= Total rental revenue / lease life.

Example: $50,000 total rent revenue / 6-year lease life.
Here: original rent amount is $55,000 but with the free rent involved, only 50,000 total rent is calculated to find the periodic rent amount.

Journal entries on Free or Reduced rent
-----------------------------------------------------
Dr. Rent receivable
Cr. Rent revenue
Here its on the new rent amount that's been modified to deal with months of free rent.


Next later months journal entry is

Dr. Cash
Cr. Receivable
Cr. Rent revenue

14

What is the formula to find the interest revenue when given:

Payment amount per period
Interest rate
Start date
Payment Date
PV of lease

PV of lease
- Payment
----------------
= New amount
x (interest rate % x N / 12 months)
----------------------
= $$ interest revenue

Note: The N / 12 months (like 3 / 12 months) is determined by

Payment date and the End-of-year date

Also, knowing the start date helps determine:

If Payment Date and Start date the same, no report interest.
If payment date happens after Start date, report interest.

15

What is the formula to find the new current capital lease obligation net of current portion on the current balance sheet date when the Payment date occurs after the Start Date (signing date/ inception date)?

Lease obligation amount (principal amount)
x interest %
-----------------
= Interest amount
- Cash Payment amount
--------------------------
Principal reduction cash payment amount
|
|

Lease obligation amount
- Principal reduction cash payment amount
-----------------------
= New Lease obligation principal amount (net of current portion)

16

What is the formula to find the new current capital lease obligation net of current portion on the current balance sheet date when the 1st Payment date occurs on the same day as the Start Date (signing date/ inception date)?

Lease obligation principal amount
- 1st cash Payment amount (on payment date
------------------------
= New principal balance
x interest %
-----------------
Interest amount
- 2nd cash Payment amount
--------------
= 2nd Principal cash payment/reduction amount

Then:
New principal balance
- 2nd Principal cash payment/reduction amount
--------------------------------
= New new principal balance

17

How do you find the PV of the lease payments when the lease payments includes $$ taxes, $$ insurance, $$ maintenance costs?

Lease payments
- Taxes
- Insurance
- Maintenance costs
-----------------------
= New lease payments
x PV factor
----------------
= PV on lease payments

FYI - Example:
$100,000 lease payments (per period)
- 10,000 Taxes
- 20,000 insurance
- 30,000 maintenance costs
----------------
= $40,000 new lease payments
x 5.6 PV factor
-------------
= $224000

18

How you do calculate the rental income from a Operating lease where there are different $$ rent amounts in year one and another rent amount in another year?

Rent in year one
+ Rent in years 2 to n ($$ x # of years)
--------------------------------------
Total rent

Next: Total rent / total lease life

FYI - Example:

Rent in year one: 8000
+ Rents (Y2 to Y4): 50,000 ($12,500 x 4 yrs)
---------------------------------------------
= $58,000 total rent income

$58,000 / 5 total lease years
= $11,600 rent income recognized in year one

19

How you do calculate the rental income from a Operating lease where there are different $$ rent amounts in year one and another rent amount in another year?

And in Year one, there's 6 months free free rent.

Example:

Rent in year one: 4000

20

What is the formula to calculate the depreciation expense

on a capital lease involving Bargain purchase option (BPO)?

Total capital lease cost - BPO
--------------------------------------------
#of years or periods on asset's ECONOMIC USEFUL LIFE.

= Depreciation expense in current year

21

How to calculate the rent expense when bonus is involved?

First period's Rent epense
+ Amortized Bonus (Total $$ x 1 / total months in lease)
----------------------------------
Total rent expense in current period

FYI - Example:

First month's rent 20000
Amortize bonus + 500 ($30,000 x 1 / 60 mths)
-------------------------------------
= Total rent expense $20,500

22

How to calculate the depreciation on the leasehold improvements?

And how to calculate the new improvement cost (net of depreciation)?

1) Pick the smaller life:
Lease life or Improvement's life

2)

Total improvement cost / Lease life or improvement life

x [N / 12 months]
----------------------------------
= depreciation expense


3)

Total improvement cost
- Depreciation expense
----------------------------------
= Improvement amount (net of depreciation expense)

23

If capital lease, recognize ______

If operating lease, recognize ___

If capital lease, recognize interest

If operating lease, recognize rent

24

What is a rent kicker?

Is this an expense or an capitalized item?

Rent kicker = premium rent payment required for specific events.

Rent kicker = expense item (period expense).

25

What is a security deposit?

How is security deposit reported for the lessee?

Security deposit
= Lessee puts money in to cover any future damages on leased item.
= it's reported as an asset until refunded by the lessor.

26

How is Security Deposit reported for the Lessor?

What is the journal entry for Lessor recognizing a refundable lease?

If it's:

(1) Nonrefundable:
Then >> Lessor records it as deferred (unearned revenue)
And >> Lessee capitalize it as Prepaid rent expense until the lessor considers the deposit earned.

OR:

(2) Refundable:
Lessor reports it as a Liability
And Lessee treats it as "receivable"
Until >> Deposit is refunded back to lessee

Lessor's Journal Entry on Refundable Deposit
Dr. Cash
Cr. Refundable Deposit
Note: this is receive cash (debit) and record liability (refundable deposit)

27

CPA Exam tip:

Can security deposits be recognized as Revenue in advance (or before) the Deposits are earned as revenue?

If so or if not, please explain how come.

The CPA Exam has attempted to trick candidates into recognizing security deposits as revenue in advance of their being earned (violation of the revenue recognition rule and rule of conservatism).

Other words:
Revenues received in advance before being earned = NOT REVENUE.

Deposits are only recognized as REVENUE when it is determined that the Deposits are "completely earned" (earning process is complete).

Just FYI below:
The fact pattern will provide information about the historical percentage of security deposits that ultimately will be earned.

Remember, revenue is only recognized when the earning process is complete.

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