Lesson 16 Flashcards
What are the guidelines for accounting for guaranteed residual value? (2)
- If it is probable that the expected residual value is equal to or greater than the GRV, the lessee should not include the GRV in the computation of the lease liability.
- If it is probable that the expected residual value is less than the GRV, the difference between the expected and GRV should be included in computation of the lease liability.
What happens when the fair value of the asset is less than the expected residual value?
The lessee will have to further compensate the lessor under the residual value guarantee. The lessee will record a loss.
Example - due to poor maintenance - the fair value fell below expected fair value and must be compensated.
Sales revenue and COGS amounts being reported at different amounts fall under which accounting situation?
Unguaranteed residual value
Diagram of the difference between GRV and UGRV.
When residual value is not guaranteed in a sales type lease, what is the process for accounting for this situation?
The lessor reduces Sales Revenue and COGS by the present value of the UGRV.
What are executory costs?
are normal expenses associated with owning a leased asset, such as property insurance and property taxes.
What is a gross lease?
the payments to the lessor are fixed as part of the rental payments in the contract.
What is a net lease?
the lessee makes variable payments to a third party or to the lessor directly for the executory costs.
What are initial direct costs?
They are incremental costs of a lease that would not have been incurred had the lease not been executed.
Examples of IDC.
- Commissions
- Legal fees resulting from the execution of the lease
- Lease documents preparation costs
- Consideration paid for a GRV by an unrelated third party
What happens if a bargain purchase option exists?
The lessee must increase the present value of the lease payments by the present value of the option price.
How should the Lease Liability account should be disclosed as?
Current portions in current liabilities and the remainder in noncurrent liabilities
A lessor with a sales-type lease involving an unguaranteed residual value at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts?
The sales price less the present value of the residual value.
Which of the following would be included in the Lease Receivable account? I. Guaranteed residual value. II. Unguaranteed residual value. III. Executory costs IV. Rental payments.
I, II, and IV
