Leases

Question 1

When do you recognize profit from a sale/leaseback transaction?

Answer 1

If the lease meets one of the criteria for capital lease treatment (it does—the lease transfers title to the seller-lessee at end of lease term), then any gain on the sale should be deferred and amortized.

Again, the key element is the retention of the right to all remaining use of the property. Transfer of risks of ownership is not one of the four criteria for capital lease treatment.

Question 2

What are the 4 criteria for capital lease?

Answer 2

TT=Transfer Title
BPO= Bargain Purchase
75= 75% economic life of asset
90=90% of asset FV

Question 3

what is the depreciation life treatment for capital assets?

Answer 3

TT/BPO= use asset economic life
75%/90%= use lease life

Question 4

What are the components of the lease receivable for a lessor involved in a direct financing lease?

Answer 4

The lessor shall measure the gross investment in a direct financing lease initially as the sum of the following amounts:
•The minimum lease payments
•The unguaranteed residual value accruing to the benefit of the lessor

Question 5

What is JE for direct financing lease?

Answer 5

On January 1, 20X1, the lessor makes the following entry:

01/01/20X1 Min lease payment $1,180
Cost of Sales 700
Sales $1,000
Equipment (or inventory) 700
Unearned Income 180
Note to calculate interest earned:
The interest accrues from the payment in July to the end of the year, thus $146,000 ($2,920,000 × 0.1 × 6/12).
=CVxinterestxtime

Question 6

On March 1, 20X1, Ila Co. modified the terms of a 4-year lease of equipment. Ila had leased the equipment on January 1, 20X1, and properly recorded it as a capital lease. Under the modified provisions, the lease would have been classified as an operating lease. How should Ila account for the modified lease?

Answer 6

a change in the provisions of a capital lease gives rise to a new agreement classified as an operating lease, the transaction shall be accounted for under the sale-leaseback requirements.”

Question 7

FASB ASC 360-10-15-4 requires testing for impairment loss for certain long-lived assets. Which of the following types of leases is tested for impairment?
I.Capital leases of lessees
II.Long-lived assets of lessors subject to operating leases

Answer 7

Type of leases subject to impairment:

1. Capital leases or lessees
2. Long-lived assets of lessors subject to operating leases
3. Proved oil and gas properties that are being accounted for using the successful-efforts method of accounting
4. Long-term prepaid assets.