Leases

Question 1

Lessee Accounting

• what is the general rule? Finance Lease or Operating Lease?

Answer 1

• LesseE - Finance Lease

Operating Lease if
- short term lease
- low value lease → based on value as if is “new”

Question 2

Depreciation of ROUA - analyze first if there is
(1) transfer of ownership
(2) purchase option certain to be exercised

What is the RV and UL to use
- if atleast one is present
- if none is present

Answer 2

Atleast one is present
- RV = normal
- UL = normal

None is present
- RV = Guaranteed RV
- UL = UL vs Lease Term (shorter)

Question 3

Lessor Accounting

• what is the general rule? Finance Lease or Operating Lease?

Answer 3

• LessoR - Operating Lease

Question 4

Lessor will use finance lease if the all of the following conditions are met. True or False?
- transfer of ownership
- purchase option
- material lease term (75% of UL)
- substantial lease payment (90% of FV)

Answer 4

False (any not all)

Question 5

Operating Lease (Lessor vs Lessee)
- treatment of rental payments

Answer 5

• Lessor = income (SL basis)
• Lessee = expense

Question 6

Operating Lease (Lessor vs Lessee)
- initial direct costs

Answer 6

• Lessor = added to CA of asset, expensed (SL)
• Lessee = N/A

Question 7

Operating Lease (Lessor vs Lessee)
- depreciation

Answer 7

• Lessor = ✔
• Lessee = ✘

Question 8

Operating Lease (Lessor vs Lessee)
- lease bonus

Answer 8

• Lessor = unearned rent income
• Lessee = prepaid rent

Question 9

Operating Lease (Lessor vs Lessee)
- security deposits

Answer 9

• Lessor = liability
• Lessee = receivable

Question 10

Finance Lease
- can be direct financing or sales type

Direct Financing
- lease
- Income → Interest Income

Sales Type
- sale or dealership
- Income → Interest Income + Gross Profit

Answer 10

Yes

Question 11

How to Solve (Direct Financing vs Sales Type)
- Gross Investment

Answer 11

Direct Financing
- Gross Rentals (annual rental x lease term)
- RV / Option (whether guaranteed or unguaranteed)

RV - consider only if it will revert back to lessor (since nasa lessor POV tayo)

Sales Type
- same lang

Question 12

How to Solve (Direct Financing vs Sales Type)
- Net Investment (Lease Receivable)

Answer 12

Direct Financing
- Cost of Asset
- + Initial Direct Cost (capitalizable since direct financing)

Sales Type
- PV of Gross Investment

Question 13

How to Solve (Direct Financing vs Sales Type)
- Unearned Interest Income

Answer 13

Direct Financing
- Gross Investment less Net Investment

Sales Type
- same lang

Question 14

How to Solve (Direct Financing vs Sales Type)
- Sales

Answer 14

Direct Financing
- N/A (refer to notes)

Sales Type
- Net Investment vs FV of asset (lower)

Question 15

How to Solve (Direct Financing vs Sales Type)
- Cost of Sales

Answer 15

Direct Financing
- N/A (refer to notes)

Sales Type
- Cost of Asset
- + Initial Direct Cost (expensed since sales type)
- - PV of unguaranteed RV

Question 16

Sales and Leaseback
if it is a sale transaction
- Seller / LesseE → records Finance Lease (ROUA, LL, G/L)
- Buyer / Lessor → records purchase of asset

if it is not a sale transaction
- Seller / Lessee → liability based on cash received
- Buyer / Lessor → receivable based on cash paid

Answer 16

Yes

Question 17

Sales and Leaseback
- how to compute G/L? (FCG TRS)

Answer 17

G/L not recognized
- FV of Rights Retained less CA of Rights Retained

CA of Rights Retained
- (CA/FV) x (PV of Lease Payments + FV - SP)

G/L recognized
- Total G/L less G/L not recognized