Accounting for Leases Flashcards
What is an operating lease?
Rental agreement
What basis does the lessee record rent expense?
Straight-line basis
How should lease bonus be classified?
As an asset(deferred charge) and amortized using the straight-line method over the life of the lease
What is something that permanently affixed to the property and reverts back to the lessor at the termination of the lease?
Leasehold improvements
Leasehold improvements should be depreciated over the?
Lesser of the lease life or asset/improvement life
How is a rent kicker classified?
Period expense
How is a refundable security deposit reported?
An asset until refunded by the lessor
What must the lessee due in consideration of free or reduced rent?
Take the total rent expense to be paid for the entire lease term and divide it evenly over each period
How is a nonrefundable deposit reported?
Deferred by the lessor and capitalized by the lessee until the lessor considers the deposit earned
How is a refundable deposit treated by the lessor and lessee?
Treat as a receivable by the lessee and a liability by the lessor until the deposit is refunded to the lessee
How does a lessee record a capital lease?
Dr. Fixed asset - leased property, Cr. Liability
What is the mneumonic for the conditions of being a capital lease under US GAAP?
OWNS
What are the US GAAP conditions in order to capitalize lease?
Ownership transfers, Written option for bargain purchase, 90% of leased property FV<= PV of lease payments, 75% or more of asset economic life is being committed in lease term
How many conditions must be met in order to capitalize a lease?
One
What is the mneumonic for the conditions of being a capital lease under IFRS?
OWESFACS
What are the IFRS conditions in order to capitalize a lease?
Transfers ownership, written bargain, major part of the economic life, substantially all of the fair value, gains and losses from the fluctuation, ability to continue the lease, lessee can cancel the lease, specialized nature
What is the mneumonic under US GAAP for a lease to be classified by the lessor as a sales-type or direct financing lease?
LUC
How many conditions must be met by the lessor for it to be classified as a sales-type or direct financing lease?
All three
What are the conditions to be met in order to be classified as a sales-type or direct financing lease?
Lessee owns the leased property, Uncertainties do not exist regarding any unreimbursable costs to be incurred by the lessor, and collectibility of the lease payments is reasonably predictable
What profits are earned in a sales-type lease?
Gain on sale and interest income
What profits are earned in a direct financing lease?
Interest income
The lessee records the lease as an asset and a liability at the?
Lesser of fair value of the asset at the inception of the lease or cost(present value of the minimum lease payments
When calculating the present value of the minimum lease payments, the lessee uses?
The lesser of the rate implicit in the lease or lessee’s incremental borrowing rate
How to calculate the depreciation expense for leased assets?
Capitalized lease assets - salvage value = Depreciable basis / Periods of benefit = Depreciation expense
What is the period of benefit for ownership transfer and written bargain?
Estimated economic life of the asset
What is the period of benefit for 90% FV and 75% Life?
Lease term
What is the period of benefit under IFRS?
Lesser of the lease term and the useful life of the asset
What is the rule for the first payment of annuity due?
All principal
How is gross investment calculated?
Lease payment + unguaranteed residual value
How is net investment calculated?
Lease payment + unguaranteed residual value x PV
How is unearned interest revenue calculated?
Gross investment - net investment
How is cost of goods sold calculated?
Cost of asset - PV unguaranteed residual value
What is the rule for sales-type lease?
Cost + Profit = PV = Selling price = FV
What is the rule for Direct Financing Lease?
PV = Carrying amount of receivable = Cost of assets sold
Calculation for excess profit on sale-leaseback in an operating lease?
Sales price - Asset NBV = Tentative gain - PV min. lease payment = Excess gain
Calculation for excess profit on sale-leaseback in an capital lease?
Sales price - Asset NBV = Tentative gain - Leaseback asset = Excess gain
What is done with gains when the PV of the rent payment are equal to or greater than 90% of the FV of the property?
Defer gain and amortize with leased asset
What is done with gains when the PV of the rent payment is less than 90% of the FV but greater than 10% of the FV of property at inception?
Defer gain up to the PV of the mimum leaseback payments or capitalized asset
What is done with gains when the PV of the rent payment is less than 10% of the FV of the property at lease inception?
Recognize gain or loss at the time of the sale-leaseback transaction
When is a loss recognized when the FV of the property is less than BV?
Loss is recognized immediately
When is a loss recognized when the sales price is below FV?
Loss is deferred and amortized over the leaseback period
Under what conditions would a sublease be considered an operating lease?
90% FV and 75% of life
