Leases

Question 1

What are the qualifications for a financing lease?

Answer 1

Transfer of ownership
Option to purchase the asset
Majority of the rest of economic life (75%)
PV => FV of asset
Asset is specialized with no alternative use

Question 2

How do you record a financing lease

Answer 2

Debit Right of use asset
Credit Lease liability

Question 3

How do you account for cash incentives

Answer 3

Debit the cash and include it in the lease liability amount

Question 4

How do you record lease expense on a financing lease

Answer 4

Debit Interest Expense & Lease Liability
Credit Cash

Question 5

How do you record lease expense on an operating lease

Answer 5

Debit lease expense
Credit lease liability (accrual)

Debit lease liability
Credit Cash (payment)

Question 6

How do you manage a right of use asset for a financing lease

Answer 6

Amortize the asset by
Debit ROU asset amortization
Credit ROU asset

Question 7

How do you manage a right of use asset for a operating lease

Answer 7

Debit lease expense
credit ROU asset

Question 8

What is a sales type lease

Answer 8

When a lessor records a financing lease to its lessee

Question 9

How does a lessor record a sales type lease on commencement

Answer 9

Debit Net investment in lease
Credit CV of underlying asset and Selling Profit

Debit Indirect cost expense
Credit cash

Question 10

How do you record a return of underlying asset to lessor

Answer 10

Debit Asset
Credit Net investment in lease