21.2 (Accounting for Finance Leases)

Question 1

Accounting for finance leases

Answer 1

The accounting for a lease arrangement by lessees and lessors depends on classification of the lease as a sale of the underlying asset. If the lease is in substance a sale, the lease is classified as a finance lease.

Question 2

Calculating the lease liability (Lessee)

Answer 2

If the lessee knows the implicit interest rate, then it does not need to use the incremental borrowing rate when calculating the present value of the lease payments.

(Why is gross amount not recorded? Why the present value?)

To record the lease
Debit: Right-of-use Asset
Credit: Lease Liability

Question 3

To record the first lease payment (Lessee)

Answer 3

Debit: Lease Liability
Credit: Cash

Question 4

Interest expense (Lessee)

Answer 4

The total financing cost (interest expense) over the term of the lease is the difference between the present value of the lease payments and the actual cash disbursed.

Question 5

To record interest expense (Lessee)

Answer 5

Debit: Interest expense
Credit: Lease liability

Question 6

To record amortization of the asset (Lessee)

Answer 6

Debit: Amortization expense
Credit: Right-of-use Asset