-Leases

Question 1

What is an ROU (Right of Use) Asset?

Answer 1

Lessee has the Right of Use for the underlying

asset throughout the term of the lease.

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Question 2

What are the four criteria for a Finance Lease (POETS)?

Answer 2

A Lease is a Finance Lease if it meets ANY of the following (POETS):

• Present Value: Present Value equals or exceeds Fair Value
• Option to Purchase: Exercise is reasonably certain
• Economic Life: Lease term is major part of Economic Life
• Transfer of Ownership
• Specialized Nature: No alternative use to Lessor at end of Lease

Question 3

What are the criteria for an Operating Lease?

Answer 3

None of the Criteria for a Finance Lease (POETS) satisfied and the Lease Term is longer than 12 months*.

*If less than 12 months, it’s a Short-Term Lease and gets no Balance Sheet recognition.

Question 4

What is a Short-Term Lease and what are the advantages?

Answer 4

Advantage: Avoids Balance Sheet recognition

Requirements:

• Lease Term is 12 months or Less
• Exemption disallowed if Purchase Option exercise is reasonably certain

Recognition:

• No Asset & Liability Recorded
• Lease Payments on Straight Lines

Question 5

What is the Journal Entry for Lease Payments for Short-Term Lease?

Answer 5

Dr. Rent Expense

• Cr. Cash or Lease Payable

Question 6

What are the Journal Entries for a Finance Lease?

Answer 6

Journal Entry – ROU Asset Initial Finance Lease

Dr. ROU Asset

• Cr. Cash
• Cr. Lease Liability

Journal Entry – Lease Payments

Dr. Interest Expense

Dr. Lease Liability

• Cr. Cash

Journal Entry – ROU Asset Amortization

Dr. ROU Asset Amortization

• Cr. ROU Asset

Question 7

What are the Journal Entries for an Operating Lease?

Answer 7

Journal Entry – Initial Operating Lease

Dr. ROU Asset

• Cr. Lease Liability

Journal Entry – Lease Payments

Dr. Lease Liability

• Cr. Cash

Journal Entry – ROU Asset Amortization

Dr. Lease Expense

• Cr. ROU Asset

Question 8

What are the Journal Entries for a Sales-Type Lease (Lessor)?

Answer 8

Journal Entry – Lease Commencement

Dr. Net Investment in Lease

• Cr. Asset (CV)
• Cr. Selling Profit

Dr. Initial Direct Cost

• Cr. Cash

Journal Entry – Receipt

Dr. Cash

• Cr. Interest Income
• Cr. Net Investment in Lease

Journal Entry – Lease Termination

Dr. Asset

• Cr. Net Investment in Lease

Question 9

What are the Journal Entries for a Direct Financing Lease (Lessor)?

Answer 9

Journal Entry – Lease Commencement

Dr. Net Investment in Lease

• Cr. Asset (CV)
• Cr. Cash (Initial Direct Cost)

Journal Entry – Receipt

Dr. Cash

• Cr. Interest Income
• Cr. Net Investment in Lease

Journal Entry – Lease Termination

Dr. Asset

• Cr. Net Investment in Lease

Question 10

What are the Journal Entries for an Operating Lease (Lessor)?

Answer 10

Journal Entry – Lease Commencement

Dr. Initial Direct Cost

• Cr. Cash

Journal Entry – Receipt

Dr. Cash

Dr. Accrued Rent Receivable

• Cr. Lease Revenue