Leases

Question 1

Short term lease journal entries

Answer 1

What lessee records
Dr. Lease Expense
Cr. Cash or Payable

What lessor records
Dr. Cash or receivable
Cr. Lease revenue

Question 2

Operating Lease - Lessor

Answer 2

J/E if cash received at begging of year
Dr. Cash or receivable
Cr. Unearned lease revenue

J/E to recognize revenue at the end of the year
Dr. Unearned lease revenue
Cr. Lease revenue

Depreciation of asset
Dr. Depreciation Expense
Cr. Accumulated depreciation

Question 3

Operating Lease - Lessee

Answer 3

Lessee capitalizes PV of minimum lease payments
Dr. Right-of-use asset
Cr. Lease liability

Journal Entry for payment at beginning of the year
Dr. Lease liability
Cr. Cash

To record lease expense at the end of year
Dr. Lease expense - payment amount
Cr. Right-of-use asset - amount after interest
Cr. Lease liability - interest expense

Then continue the cycle

Question 4

Finance Lease criteria

Answer 4

• title is transferred to lessee
• lessee has the option to buy asset at the end of lease at a bargain
• lease term is 75% or more of the useful life of the asset
• PV of minimum lease payments is 90% or more of the FV of asset
• asset has no alternate use

Question 5

What rate does the lessor use

Answer 5

Always uses the implicit rate

Question 6

Lessee interest rate

Answer 6

Lower of the incremental borrowing rate or lessor’s implicit rate

Question 7

What amount does the lessee capitalize a leased asset

Answer 7

Lessee capitalizes at the lesser or PV of minimum lease payments or assets FV

Question 8

Finance lease - lessee Journal entries

Answer 8

Journal entry at inception of lease
Dr. Right of use asset
Cr. Lease liability

Journal entry for payment at end of year
Dr. Interest expense
Dr. Lease liability
Cr. Cash

Amortization - length of the lease not useful life
Dr. Amortization expense
Cr. Right of use asset

Question 9

Sales type lease for lessor journal entries using gross method

Answer 9

At inception of lease annuity due
Dr. Lease receivable - lease payments
Cr. Unearned interest - difference between FV & payments
Cr. Sales Revenue - FV of asset at inception

First lease payment
Dr. Cash
Cr. Accounts receivable

Entry to accrue for interest
Dr. Unearned interest
Cr. Interest revenue

Continue cycle

Question 10

Direct Financing lease journal entries for lessor

Answer 10

At inception
Dr. Lease receivable
Cr. Deferred gross profit - difference between cost of asset & FV
Cr. Inventory/equipment

Question 11

Direct Financing lease annual lease payment

Answer 11

FV of equipment minus present value of residual value. Then divide that by the present value of the annuity

Question 12

Direct financing lease, lease revenue

Answer 12

CV time rate the amortizes to 0

Question 13

Sales leaseback - lessee journal entries

Answer 13

Journal entry to record the sale
Dr. Cash
Dr. Accumulated depreciation
Cr. Equipment
Cr. Gain

Journal entry at inception of operating lease
Dr. Right of use asset - present value of lease payments
Cr. Lease liability

Journal entry over life of the lease
Dr. Lease expense - payment
Dr. Lease liability - payment minus interest
Cr. Right of use asset - payment minus interest
Cr. Cash - payment

Question 14

What happens in a sales lease back

Answer 14

In a financing lease the lessee essentially takes ownership of the leased item. When the lease is over the lessee sells back the leased item to the lessor & the lessor leases the item back to the lessee

Question 15

What makes failed sale in a lease back question

Answer 15

If the new lease is finance lease and the lessee takes ownership of the leased item again

Question 16

Initial direct costs

Answer 16

Included in total of right of use asset and don’t use the PV factor

Question 17

Residual Value

Answer 17

Find PV of single sum and subtract from FV asset to calculate PV of lease payments - lessor