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Flashcards in Leases Deck (38)
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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?

Interest Revenue (or expense for lessor) decreases with passage of time

Principal amount increases with each payment

Carrying amount of Lease decreases


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?

Risk of ownership passes to lessee by:
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


Treatment of lease bonus

Deferred and recognized over the life of lease on straight line basis


Lease disclosure requirements

Disclose future minimum lease payments for 5 years and lease term in aggregate. Minimum lease payment excludes variable costs


How are scheduled rent increases treated

Straight line of uneven lease payments


Depreciable life of leasehold improvements (lessee)

Depreciated over lesser of lease term or useful life


Treatment of leasehold improvements under lease with renewal option

Depreciate over original and renewal period of renewal is probable


Calculate total interest revenue over life of lease

Total lease payment - FV of leased asset


What do direct financing leases recognize

Interest revenue


How is gain and interest treated and calculated in sales type lease

Lessor recognizes gain
Gain = PV of lease payments or selling price - Cost
Interest = SP - downpayment x interest rate x time


What is unearned income on sales type lease

Gross investment - sum of PV of gross investment components


What is unearned income on direct financing lease

Gross investment - cost (PV of lease payments


Revenue recognition of sales type lease requires what method

Interest method, constant rate of return


How does lessee record leased asset and lease obligation

Lower of PV of minimum lease payments or FV


Rate used for PV of minimum lease payments

Lower if incremental borrowing rate or lessors implicit rate if known by lessee


What is included in minimum lease payments

Rentals, lessee guaranteed residual value or bargain purchase option


What is a bargain purchase option

Option to purchase asset for less than FV


When is guaranteed residual value included in minimum lease payments

Of guaranteed by lessee and not 3rd party


How are a lessee's annual executory expenses treated

Executory expenses (ie real estate taxes) are expense as incurred and excluded from minimum lease payments


How is equipment under capital lease depreciated?

By lessee over the useful life of the asset


Bargain purchase option treatment at end of lease term

Remains in lease payable


What is a sale leaseback and how is gain or loss treated

Treated as though two transactions were a single financing transaction

Gain or loss is deferred and amortized over lease term (if asset to lessor) and economic life (if asset to lessee)