Book 3_FinAn_READING-36_TOPICS-IN-LONG-TERM-LIABILITIES-AND-EQUITY-Part-1

Question 1

Advantages of leasing rather than purchasing

Answer 1

• An asset may include a smaller initial cash outflow
• Lower-cost financing
• Less risk of obsolescence

Question 2

A finance lease must meet at least one of the following criteria:

Answer 2

1. Ownership of the leased asset transfers to the lessee.
2. The lessee has an option to buy the asset and is expected to exercise it.
3. The lease is for most of the asset’s useful life.
4. The present value of the lease payments is greater than or equal to the asset’s fair value.
5. The lessor has no other use for the asset (i.e., the asset is of a specialized nature only suitable for use by the lessee).

Question 3

Lessee Reporting - long term lease

Answer 3

• For both finance and operating leases: Record ROU and lease liability, both equal to the present value of the promised lease payments

Question 4

Lessee Reporting - Operating lease (difference)

Answer 4

US GAAP: ROU asset is amortized by the same amount each period as the decrease in the lease liability
- interest expense and amortization are combined in lease expense
- operating cash outflow.

Question 5

Lessee Reporting - short term lease

Answer 5

Rent expense is reported on the income statement, and no balance sheet entries are required.

Question 6

Lessor Accounting - Finance lease

Answer 6

• The lessor removes the leased asset from its balance sheet and adds a lease receivable asset
• The lessor reports the interest portion of the lease payments as income

Question 7

Lessor Accounting - Operating lease

Answer 7

Keeps the leased asset on its balance sheet, reports lease payments as income, and reports depreciation and other costs as expenses.

Question 8

Sales-type leases

Answer 8

A profit or loss is recorded on the leased asset, as if it was inventory sold at initiation of the lease
- The revenue is the present value of lease receipts.
- Cost of sales is the carrying value of the asset less the present value of any residual value

Question 9

For a direct financing lease

Answer 9

any gain or loss on derecognition is deferred and recognized in the income statement over the life of the lease as interest.