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FAR 2 > Lease > Flashcards

Lease Flashcards

1
Q

If there are incremental borrowing rate for lessee and implicit rate of lessor, which rate to use for calculating interest expense?

What about if there are two MLP for lessee and lessor, which one to use for lessee to record as MLP?

A

Interest expense use the lesser of the two rates, implicit rate if known by lessee

MLP: use the incremental borrowing rate lessee’s used to calculate the MLP

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2
Q

Study lease JE

A

Remember how to do lease JE

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3
Q

JE for direct financing lease for lessor

A

Lessor:

Initial recognition
Dr. Lease receivable (MLP+ unguaranteed RV)

CR. Unearned interest revenue
CR. Asset

Recognize interest revenue

Dr Cash and unearned interest revenue
CR. Lease receivable =lease payment
CR. Interest revenue = beg MLP* lessors implicit rate
Interest revenue and unearned interest revenue JE are symmetry

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4
Q

JE for financing lease for lessee

A

At initial recognition

Dr Leased assets MLP
CR leased liability

Recognize interest expense

Dr Interest expense beg MLP* interest rate
Dr Leased liability
CR cash = lease payment amount

Need to recognize depreciation expense

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5
Q

For sales type lease JE for lessor

A

At initial recognition

Dr. Lease receivable (sum of lease payment and unguaranteed RV)
Dr unearned interest revenue (total interest over the term)

CR sales at FV = selling price

CR COGS and asset derecognition. = cost of asset

Example
Lease receivable 27777
Unearned interest revenue. 2006
Sales. 25771

COGS. 20000
Assets. 20000

Lessor recognize gross profit immediately

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6
Q

IFRS and GAAP difference

  1. Different in terms
  2. Classification of lease
  3. Conditions for finance lease
  4. Rate to be used?
A
  1. Finance lease is referred as mftg or dealer finance asset
  2. Criteria is not using the 75% and 90% to determine, more judgement based and depends on if substantial risk and reward of ownership is transferred to lessee
  3. TT and BPO
    + judgment based
    + additional consideration
  4. IFRS only use lessor’s implicit rate in all cases, unless the lessee is not able to determine he rate
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7
Q

Capital Leased assets
Term 8 years
FV 200,000. No RV
BVof asset is 140k immediate at signed lease
10% interest
Signed lease on 1/1/03, first payment due PV of annuity due is 1/1/03

Annuity due factor= 5.86842

JE for lessee and lessor

A 
Lessee:
1/1/03
Dr. Leased asset 200k
   Leased liability.      165,919
   Cash.          34081

200000/5.86842 = 34,081

12/31/03
Interest expense 165919 * 10%
Interest spay able. 16592

Lessor
1/1/03
Dr. Lease receivable 238567 =340818 -34081
Dr. Cash. 34081
Dr. COGS. 140k
Unearned interest 72648 = 340818-200000
Equipments. 140k
Sales. 200k

Unrated interest revenue 16592
Interest revenue. 16592.

If not due and the cv of lease is 200k, then the JE for lessor would be:
Lease receivable 299910
Unearned LR. 99910
Equivalents. 200000

Record Interest 
Dr  Cash.   37489
Dr. Unearned interest 20000
       CR.  Lease receivable    37489
       CR.   Interest receivable 20000
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8
Q

How should lessee and lessor treat the unguaranteed RV in the lease?

What about executors cost?

A

Lessee: exclude PV in MLP, but guaranteed by third party, the don’t.

Lessor: always included at PV for either guaranteed LR unguaranteed

Executors cost is subtracted before calculating the PV of MLP

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9
Q

GAAP for Leased building with land

A

When lease land only, criterion 3 and 4 don’t apply

If criterion 1 or 2 met, then lessee record as two separate lease, but lessor combine both together

If neither are met, and FV of land is 25% of the combined value, land is operating lease, building is either operating or capital lease, check the criteria.

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10
Q

IFRS and GAAP difference on initial direct cost

A

IFRS
Expense related to negotiating and completing the lease agreement is included ( legal fees, cost is credit investigation, employee compensation related to lease and clerical cost)

These costs exclude solicitation and advertising

Lessee accounting is not affected by those costs

For lessor, depends on what type of lease
Operating lease:capitalize and amortize over the lease term

Sales type lease: as selling expense

Direct financing lease: include in lessor’s gross receivable, cash and other assets are decreased, total lease interest is decreased as well.

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11
Q

What is the treatment for leased assets for 5 yrs that has 8 yrs if useful life, and has estimated RV and BPO. What is the deprecation expense?

A

(Mv of assets - RV )/ 8 yrs

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12
Q
  1. How to calculate sales leaseback gains?
  2. Sales lease back gain and losses situations
  3. How is sale lease back works?
A
  1. Gain = selling price - CV of assets
  2. Gain - major lease back
    Gain - minor lease back
    Gain - between major and minor

Losses - real and artificial

  1. How:
    A sales assets to B
    A then lease it back fell B
    A become the seller lessee; B becomes buyer lessor
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13
Q

Major gain accounting treatment

A

Lessor pays seller lessee selling price > FV, difference will return to lessor in the form of higher rental , if the price

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14
Q

Accounting for operating lease gain

A

Gain Record in liability account, and amortize over the lease term to defer the gain

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15
Q

What % is sales leaseback for minor gain

A

When MLP is

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16
Q

If the gain is in between, what is the accounting?

A

Defer gain and recognize over the lease term

Ie sales lease 900k
Cv 300k
MLP = 450k

Implied Gain = 900-300 =600
Normal gain compare sales and MLP = 450

The 600-450= 150 recognized immediately, and the rest (450) will be amortized over its lease term.

17
Q

Calculation of Losses and its accounting treatment

A

Loss can be artificial or real
Artificial is the sales price is purposely lower than FV, so it can recognize loss

When FV = SP,
Real is when FV BV, any loss recorded is deferred and amortized
When loss is amortized, the capital expense is increased

18
Q

Distinguish liabilities related to equity

  1. For shares issued at fixed value of service cost

2.

A
  1. Mandatorily redeemable shares classify as liability if
    1) firm have to repurchase its own equity 2) may need to transferring assets to settle the payment.
  2. Financial instrument is exchanged by issue shares worth a fixed value (non cash transaction)
  3. Certain stock appreciation rights by issue share for service

Record at agreement
JE: dr service expense at Fixed price
CR. Liability for stock issuance

At settlement for fixed value

Dr. Liability for stock issuance
CR. CS
CR. PIC (FV -par)

Liability at fixed shares
Dr. Service expense
CR. Stock issuance obligation

At settlement
Dr. Stock issuance obligation
CR. CS
CR. PIC

  1. Put options or other financial instruments to purchase its own shards (but TS)

See next page

19
Q

Put option

What is put option?

JE for put option

A

Firm write stock for other company to sell it back at a fixed price (option price) on a specific date or during a specific period

The purchaser pays a fee for the option is about the FV of the option

Purchaser want the purchase price to stay lower than selling price

Firm want the stock price to be as high the repurchase price

The FV of the option is recorded as a liability recognized at each year end before exercise the option.

JE
At writing the option
Dr Cash at shares * option price
Put option liabilty. Same value

Year end after reevaluate the option value increased

Dr. Loss on put option. (New price -old option price )
CR. Put option liability. Same

After Option is exercised (when firm price is less than repurchase price)

Dr put option liability. =what have been recorded
Dr. TS. Shares * FV is stock
Cash. At promised repurchase price
Gain on put option (the rest)

If the option is not exercised: reverse the put option like ability and record a gain on the option

20
Q

How to treat convertible bond?

A

As debt just like non-convertible bond

Only at convention, derecognize of debt and recognize equity amount

Bond with stock warrant will be treated separately **

21
Q

Distinguishing liability difference is GAAP and IFRS

A

IFRS : financial instrument is recognized differently
It depends on if the obligation involve transfer of asset, if yes, it is a liability

Convertible bond might be separately recorded as the equity and debt portion, if the distinguish is made at issuance and continue until it derecognized

22
Q

If giving annual lease payment for lesser and the lease term, how to calculate lessor’s lease receivable and interest unearned revenue?

What about for sales lease?

A

Annual receivable * lease term + I discounted value of BPO or RV

Interest revenue is lease receivable - lessee’s lease liability

If sales type lease:
MLP * factor for lessee

Lessor:

Annual lease receivable * lease term
Equipment is always the cv of the asset
Lease interest revenue is sales lease receivable - MLR - PV of BPO or RV

COGS: lease receivable - interest revenue - equipment - sales (same as lessee recorded liability)

FAR 2 (29 decks)

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