22 - Leases Flashcards
Lessee records asset/liability at LOWER of
PV of minimum lease payment
~or~
FMV of leased item at inception
What makes a lease CAPITAL for the lessee
Meet 1 of 4
- ownership transfers
- lease has bargain purchase option
- lease term >75% of economic life
- PV of minimum lease payment is >=90% FMV
Lessee records _______ for an operating lease
Only payments are recorded
Lease Obligation xx
Cash xx
Capital lease vs operating lease
Lessee
Capital lease recorded on balance sheet
~increase in amount of reported debt
~increase in total assets
~lower NI early in lease = lower RE
Lessee’s Minimum lease payment includes
- actual installment payments (set by lessor)
- guaranteed residual value - adds to liability
- penalty for failure to renew
- bargain purchase option
- *ALL items recorded at PV**
Formula to calculate lease payment
Payment x PVAD = Asset - PV residual
LESSOR calculates payment at THEIR rate
PV residual is always subtracted, whether guaranteed or unguaranteed
How does a BPO affect depreciation
only lessee records depreciation on a capital lease
item is depreciated all the way down (no residual value)
How does a guaranteed residual affect depreciation for the lessee
Guaranteed residual is subtracted from book value before calculating depreciation
How does a guaranteed residual affect depreciation for the lessor
N/A
How does a guaranteed residual affect the lessor
the only effect is increased interest accrual
How does a guaranteed residual affect the lease payment
payment x PVAD = Asset - PV residual
the residual is subtracted from the asset value when lessor calculates lease payment. It is treated the same if guaranteed/unguaranteed.
The residual is the value left in the leased item, and is not included when calculating lease payments.
Can the PV of minimum lease payment be different for lessor and lessee
The lessee MUST use the lower of its rate or the lessor’s implicit interest rate.
The discount rate used by the lessee/lessor may vary, so the amount of lease obligation booked may vary.
Guaranteed vs unguaranteed residual value - Lessee
PV of Guaranteed is included in minimum lease payment.
Guaranteed residual increases amount booked at inception.
Lowers depreciation (subtracted from FV)
Increases interest
How does a BPO affect lease
Lessee: add PV of BPO to inception cost booked as asset & lease liability. ALSO: when a BPO is exercisable it is assumed to happen (trick Q may shorten lease term)
Lessor: subtract BPO from amt to recover when determining lease payment
How is liability at inception (lessee) calculated
Lower of FMV or PV of minimum lease payment **calculated using lower known rate
