21 Lessee Accounting Flashcards
From a seller-lessee’s perspective, what types of leases are most likely to follow in a sale-leaseback?
A short-term lease or an operating lease, not a finance lease
In accounting for an operating lease by the lessee, the annual lease expense effectively consists of two components. What are the two components?
The lessee calculates an interest component and an amortization component based on the right-of-use asset.
Annual lease expense is recognized evenly over the lease period, but the amount of the lease expense represented by each component changes over time.
In other words, the lease expense remains the same each period. The proportion of the interest component and amortization that contribute to the lease expense amount changes over time.
How is depreciation recorded by the lessee in an operating lease?
The lessee does not record depreciation under an operating lease.
The lessee amortizes the right-of-use asset.
What accounts are reported by a lessee accounting for an operating lease? On what statement does each account appear?
Lease liability—Balance Sheet
Right-of-use asset—Balance Sheet
Lease expense—Income Statement
Also note that accounts payable and cash may be impacted.
How does a lessee account for variable lease payments when the amount of the variable payment changes from period to period and is unknown at the inception of the lease?
Because the amount of the variable lease payments and the fluctuation in the payment are unknown, the lessee will expense the variable amount in the period incurred.
How does a lessee account for initial direct costs?
If the cost is an initial direct cost, then it is included in the right-of-use asset amount and amortized over the life of the lease. An initial direct cost does not add to the lease liability. An example of an initial direct cost is a document preparation fee associated with a lease that has been executed.
How does a lessee account for a lease with a bargain purchase option?
The bargain purchase option is accounted for in a manner similar to a guaranteed residual value.
The present value of the bargain purchase option is included in the lease liability.
A lessee recording amortization of a right-of-use asset will use the lease term to amortize the asset unless…
…the remaining useful life of the asset is shorter than the lease term.
Study hint: This would be an unlikely scenario. Expect to see the vast majority of right-of-use assets amortized over the lease term by the lessee.
How does a seller-lessee calculate the gain or loss on the sale of an asset that it immediately leases back?
The transaction is recorded in the same manner as any other sale transaction of an asset.
Cash XX
Accumulated Depreciation XX
Equipment XX
Gain XX
The above journal entry assumes a gain. A gain or loss is calculated based on the difference between the sales price and the carrying amount of the asset.
Describe the conditions of a failed sale.
If a seller-lessee sells an asset but control does not effectively pass to the buyer-lessor, then revenue recognition criteria have not been met. The seller-lessee may not account for the transaction as a sale and instead must account for the transaction as a financing transaction.
How does a lessee calculate the interest component of lease expense?
The lessee used the effective interest method to calculate the interest component based on the interest rate and the lease liability balance.
What rate is the lessee required to use to calculate the present value of a capital lease?
The implicit rate if readily determinable
List the criteria for a lessee to classify a lease as a finance lease.
Meet one or more of the following:
Lease transfers ownership.
Lease contains a bargain purchase option.
Lease term is 75% or more of useful life.
Present value of minimum lease payments is 90% or more of market value.
The asset does not have an alternative use.
List the items included at present value in a lease liability balance for lessee.
Annual lease payments
Bargain purchase option
Lessee guarantee of residual less the expected residual value of the asset at the end of the lease
