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Flashcards in FAR-Leases Deck (47):
1

How are lease liabilities recognized and amortized?

Lease liabilities are recognized at PV, then ammortized using effective interest method

2

At what rate or discount does the lessor record its receivable?

The lessor records the receivable at dollar value.

3

With a direct financing lease, what is equal to the present value of the lease payments?

The FMV of the equipment that is leased.

4

What is the cost basis of an asset acquired by a lease which is accounted for as a capital lease?

The present value of the minimum lease payments under the lease (exclusive of executory costs and any profit thereon) discounted at an appropriate rate.

5

With a sale leaseback, how are revenues treated when the PV of rental payments is less than 10% of the asset's FMV?

All revenues, gains and losses are recognized immeidately

6

What are the three types of period costs that a lessee experiences with capital leases?

Interest expense, amortization expense, executory costs

7

What is a sale-leaseback?

Typical of this type of lease is an arrangement whereby one party sells the property to a second party, and then the first party leases the property back. Thus, the seller becomes a seller-lessee and the purchaser a purchaser-lessor.

8

In a Sales-Leaseback transaction, how should the seller-lessee recognize profit from the original sale?

The FASB rule is that if the initial sale produces a profit, it should be deferred and amortized in proportion to the amortization of the leased asset if it is a capital lease or in proportion to the rental payments if it is an operating lease.

*There are exceptions to this rule if the sale-leaseback gives returns only minor rights, or of the profit is larger than the PV of the minimum lease payments.

9

In a sales-leaseback, how does the seller-lessee recognize profit when the lease only gives it minor rights?

The sale and leaseback are separate transactions, and any profit on the sale is recognized immediately.

10

With a sales-leaseback, how is the seller-lessee gain when the PV of rental payments are > or = to 90%? Or if the 75% test is met?

Leaseback is a capital lease. All gain is deferred and offset again depreciation expense.

11

With a sales-leaseback, how is the seller-lessee gain when the PV of rental payments are >10% but less than 90%?

1) Defer gains up to PV of leaseback payments, and recognize rest immediately (If there is a gain of 100, and payments will be 80, recognize a gain of 20 and defer the gain of 80)

2) Determine if lease is capital or operating based on rules of TT, BPO, 75 or 90. (Must meet at least one)
* If Capital, offset against depreciation expense
* If Operating, offset against rent expense

12

With a sales-leaseback, how is the seller-lessee gain when the PV of rental payments are less than 10%?

The lease and sale are two different transactions. Recognize all gains and losses immediately.

13

With a capital leaseback, how is loss handled when the BV>Sales price, but FV>BV?

The real loss (FMV-BV is recognized immediately). The artificial loss (Total Loss - Real Loss that is recognized immediately) is deferred and amortized as an addition to rent expense)

*Wiley Page 507; Roger 12.06

14

When is a sales-leaseback recognized as a operating lease when the PV of rental payments equal 90% or more of the FV of the asset sold?

When it takes place during the last 25% of the assets economic life.

15

In addition to TT, BPO, 75, or 90, what are the other two criteria that must be met for the lessor to recognize a lease as a capital lease?

1) The collectibility of minimum lease payments is predictable
2) There are no important uncertainties concerning costs yet to be incurred by the lessor

16

In a lease, how are security deposits recorded and treated?

Recorded as unearned revenue and are not considered earning until the end of the lease-term.

17

How are initial direct costs by the lessor recorded and treated under Operating, Sales-Type, and Direct Financing Leases?

Operating: Recorded as asset and amortized
Sales-Type: Immediately expensed
Direct Financing: Recorded as asset and amortized, reducing interest revenue

18

How are lease bonus fees paid by the lessee recorded and treated?

Are recorded as an pre-paid rent on the balance sheet are amortized straight line over the lease term as an rental expense.

19

What is a direct financing lease?

A lease in which a leasing company (bank) leases an asset without the intent to sell it. The only revenue for the lessor is interest revenue. There is not a gain or loss.

20

What are the disclosures for a direct financing lease?

Future Minimum lease payments
Unguaranteed residual value
Earned Income
Future payments to be received over the next 5 years

21

How are executory costs recorded and treated by the lessee?

Expense immediately as the payments are made.

22

When in a capital lease, what amount does the lessee use to depreciate the asset: Lessor CV or PV of lease payments?

PV of lease payments

23

If there is not a BPO or Title Transfer in a capital lease with, how many years does the lessee depreciate the asset?

By the amount of the years of the lease. However, the economic life of the asset would be used to depreciate the asset if there was a title transfer or a bargain purchase option.

24

How are bargain purchase options accounted for in leases?

They are discounted to the rate of the present value of $1, and added to the lease liability.

In an amortization table for a lease that included a BPO, one the lease liability has been fully amortized the remaining amount will be equal to the BPO.

25

With a lease, how is the capitalized amount measured?

At the lower of the PV of minimum lease payments or its FMV

26

How is profit and interest revenue recognized with a sales-type lease?

Sales-Type Leases have an immediate profit or loss at the inception of the lease that is the difference between the cost of the property being leased and its sales price, or fair value.

Interest is earned over time.

27

How should a capital lease be treated when, during the life of the lease, the terms are changed so that it no longer meets the rules of a capital lease?

The change causes it to be treated as a sales-type lease

28

How are gains treated from Operating and capital leases?

Under both lease types, gains are amortized
Operating: Deferred gains are amortized and reduce rent expense
Capital: Deferred gains are amortized and reduce depreciation expense

29

Under what lease type is there not a depreciation expense?

Operating Lease

30

What are the alternative names for annuity due and ordinary annuity?

Annuity in advance = annuity due
Annuity in arrears = ordinary annuity

31

With a sale leaseback, how are revenues treated when the PV of rental payments is less than 10% of the asset's FMV?

All revenues, gains and losses are recognized immeidately

32

In a Sales-Leaseback transaction, how should the seller-lessee recognize profit from the original sale?

The FASB rule is that if the initial sale produces a profit, it should be deferred and amortized in proportion to the amortization of the leased asset if it is a capital lease or in proportion to the rental payments if it is an operating lease.

*There are exceptions to this rule if the sale-leaseback gives returns only minor rights, or of the profit is larger than the PV of the minimum lease payments.

33

In a sales-leaseback, how does the seller-lessee recognize profit when the profit is larger than the PV of the minimum lease payments?

The amount greater than the present value of the minimum leaseback payments is recognized at the time of the sale with the remainder of the profit deferred and recognized according to the "normal process."

34

In a sales-leaseback, how does the seller-lessee recognize profit when the lease only gives it minor rights?

The sale and leaseback are separate transactions, and any profit on the sale is recognized immediately.

35

With a sales-leaseback, how is the seller-lessee gain when the PV of rental payments are > or = to 90%? Or if the 75% test is met?

Leaseback is a capital lease. All gain is deferred and offset again depreciation expense.

36

With a sales-leaseback, how is the seller-lessee gain when the PV of rental payments are >10% but less than 90%?

1) Defer gains up to PV of leaseback payments, and recognize rest immediately

2) Determine if lease is capital or operating based on rules of TT, BPO, 75 or 90. (Must meet at least one)
* If Capital, offset against depreciation expense
* If Operating, offset against rent expense

37

With a capital leaseback, how is loss handled when the BV>Sales price, but FV>BV?

The real loss (FMV-BV is recognized immediately). The artificial loss (Total Loss - Real Loss that is recognized immediately) is deferred and amortized as an addition to rent expense)

*Wiley Page 507; Roger 12.06

38

When is a sales-leaseback recognized as a operating lease when the PV of rental payments equal 90% or more of the FV of the asset sold?

When it takes place during the last 25% of the assets economic life.

39

What is a direct financing lease?

A lease in which a leasing company (bank) leases an asset without the intent to sell it. The only revenue for the lessor is interest revenue. There is not a gain or loss.

40

What are the disclosures for a direct financing lease?

Future Minimum lease payments
Unguaranteed residual value
Earned Income
Future payments to be received over the next 5 years

41

What is the JE for a Direct Financing Lease?

DR: Lease Payment Receivables
CR: Equipment
CR: Unearned Interest Revenue

42

Are cancellable leases operating, capital or either?

All cancellable leases are operating leases.

43

When a lease is cancelled, how is the cancellation reported?

The cost of the termination is recognized as fair value

44

What is a sale without recourse?

A receivable is factored, but buyer assumes risk that receivable may not be collectable.

45

What is a sale with recourse?

A receivable is factored, but the buyer has the right to demand that the seller of the recivable make good on the receivable if the customer does not pay as promised

46

How is profit and interest revenue recognized with a sales-type lease?

Sales-Type Leases have an immediate profit or loss at the inception of the lease that is the difference between the cost of the property being leased and its sales price, or fair value.

Interest is earned over time.

DR: Cost Investment in Lease
CR: Sales Revenue
CR: Unearned Interest Revenue

DR: COGS
CR: Inventory

47

How are initial direct costs by the lessor recorded and treated under Operating, Sales-Type, and Direct Financing Leases?

Operating: Recorded as asset and amortized
Direct Financing: Recorded as asset and amortized, reducing interest revenue
Sales-Type: Immediately expensed