Flashcards in Leases Deck (19)
How is a Capital Lease recorded?
Capitalize at cost: Asset & Liability Recorded at Present Value of Future Lease Payments
What footnote disclosures are required for a Capital Lease?
Future minimum rental commitments
By year - for 5 years
All remaining years as a group
What are the requirements for a Capital Lease for a lessor?
Same as for lessee (Title- BPO or Substance)- PLUS:
Collectability of lease payments is predictable
No uncertainties about the lessor reimbursing the lessee for costs incurred
What are the characteristics of an Operating Lease for a lessee?
Risk of ownership does NOT pass
No asset or liability is recorded on the financial statements
Leasehold improvements - capitalized and depreciated over the lesser of lease life or leasehold improvement's life.
What are the characteristics of an Operating Lease for a LESSOR?
Rent revenue recorded
Leased property remains an asset and depreciated by lessor
If payments fluctuate over the term of the lease- rent revenue recognized on a straight line basis
What are the characteristics of a Direct Financing Lease VS Sales type lease?
Interest Revenue (or expense for lessor) decreases with passage of timePrincipal amount increases with each paymentCarrying amount of Lease decreases; only interest income arises => there is no manufacturers or dealer's profit
A lease where the seller is a munufacturer or dealer of the asset, and uses the lease as a way of selling the asset on an installment basis
How is a sale-leaseback recorded?
Any profit on the sale is deferred and amortized
Exception: If PV of lease payments is 10% or less of the asset's FMV- the gain is recognized
If PV of lease payments is greater than 10% of FMV and the lease is operating- all of the gain is recognized except the amount of the PV of the lease payments
What are the characteristics of lease payments under an annuity due situation?
Payments begin at the start of the lease period
Think: Rent/Mortgage payments are Due at the first of the month
What are the characteristics of lease payments under an ordinary annuity situation?
Payments begin after the end of the first year
Think: An annuity that pays you at the end of each year
What are the characteristics of a Capital Lease for a lessee? Pg. 11-3
Risk of ownership passes to lessee by:Title,Bargain Purchase Option (BPO),Substance - Lease is more than 75% of asset's useful life or PV of minimum lease payments are more than 90% of fair value
Sale-leaseback Pg. 11-6 How do you determine... and what do you defer?
a) Capital leaseback
b) Operating leaseback or Capital leaseback
c) Operating leaseback
a) PV of rental payments is greater than or equal to 90% FV of the property; defer all gain and offset against depreciation expense
b) PV of rental payment is >10% but < 90% of FV; defer all gain and offset against depreciation expense if capital lease, or offset against rent expense if operating
c) If PV of rental payments is <10% of FV; offset against rent expense; deferred gain will be ZERO
Who ALWAYS uses the rate implicit in the lease? Pg. 11-3
What is the most important when using the amortization of lease liability table? Pg. 11-4
Look at when interest was paid; if it is immediately, then you should subtract the minimum lease payment immediately
What if land is <25% FV compared to land and building, then it is considered NOT significant, therefore what should happen?
It would be accounted for like building
How do find the revenue when rent is free for the first 6 months?
Find the total revenue for the whole lease then divide by how long the lease term is
For leaseback problems, how do you find the gain on the sale of equipment? Pg. 11-6
What if the PV of the total lease payment is <10% of FV of item?
Get the gain, then depreciate it; DO NOT do it for losses
There is NO gain
How do you approach a lease problem?
Think lease car payments
Think of the amortization table; the first column (lease liability) should be the lease payment that is present valued!!!
If you made the the payment when you started the lease, there wouldn't be any interest for that time frame
In a lease, what is the significance of the amortization of a lease? Think of amortization table?
It reduces the lease liability, and the lease liability will eventually turn to zero is it gets paid off