Capital Lease Depreciation, BPO, and Residuals

Question 1

Four important items to consider are:

Answer 1

1. BPO
2. The unguaranteed residual
3. Lessee guarantee of the residual
4. Third party guarantee of the residual

Question 2

For the portion of residual guaranteed, the guarantor pays any shortfall in cash. TF

Answer 2

True

Question 3

BPO is excluded from the minimum lease payments. TF

Answer 3

False, included/capitalized

Question 4

Unguaranteed residuals are included in minimum lease payments. TF

Answer 4

False

Question 5

Unguaranteed residuals only effect the ___’s accounting. They are included in gross lease receivable at nominal value, and net lease receivable at present value.

Answer 5

Lessor

Question 6

Lessee guarantee of residual is part of the lease. TF

Answer 6

True, they are included in minimum lease payments fro both parties considered for criterion 4 and included in leased asset and liability at present value for the lessee. Included in gross lease receivable at nominal and present value for the lessor.

Question 7

In third party guarantees lessees are not involved. TF

Answer 7

True, only the lessor and is included in lessee minimum lease payments and the accounts for the lessor

Question 8

Depreciation is always based on the _____ capitalized amount at inception.

Answer 8

Initial

Question 9

If criterion 1 or 2 is met, the lessee bases deprecation of the asset at the lease term. TF

Answer 9

False, useful life of the asset at inception.

Question 10

If criterion 1 or 2 is NOT met, its assumed that the asset will return to the lessor at the end of the lease term, even if it IS a capital lease. TF

Answer 10

True

Question 11

If criterion 1 or 2 is NOT met, the lessee will use the (useful life/lease term) as the asset depreciation base.

Answer 11

Lease term, and no residual unless lessee guarantees

Question 12

If criterion 1 or 2 is NOT met, the lessee will use the (useful life/lease term/tax depreciable life) as the asset depreciation base.

Answer 12

Useful life

Question 13

In the amortization table, the CV of the lease first number is the (sum of all lease payments/PV of min lease payments).

Answer 13

PV of min lease payments

Question 14

Depreciation expense (criteria 1 or 2 met for lessee) = ________ /useful economic life.

Answer 14

PV of min lease payments. NOT Asset FMV or any other valuation.

Question 15

The BPO is added the the asset value when the lessee is calculating depreciation. TF

Answer 15

True

Question 16

The difference between the PV of the residual at inception - residual at the end of the lease term is _____ to the PV of lease payments at inception to record depreciation on an asset to reverted back to the lessor.

Answer 16

Added

Question 17

Third party guarantees have what effect on lessee depreciation?

Answer 17

None, take the PV of present lease payments / by the lease term to find depreciation in this case.

Question 18

Third party residuals occur when a third party guarantees the residual. Reflect on how both the lessee and lessor journal entries are calculated.

Answer 18

Lessee:
Leased Asset (PV of the annuity)
          Lease Liability (PV of the annuity)

Lessor:
Lease Receivable (Nom Val of payments + Nom Val RV)
COGS (BV of Asset)
Unearned Int (Plug)
Equipment (BV of Asset)
Sales (FV of Asset (which is PV of the annuity + PV of the RV))

Question 19

On the lessees books, an unguaranteed residual lease would include a dr. to _____ ______ and a cr. to _____ ______ for the _____ value of the equipment in the lease.

Answer 19

Leased asset, Leased liability, fair value

Question 20

Unguaranteed residuals occur when there is no contracted BPO in place. The PV of the UGR is the Salvage Value x the PV future sum. This amount is _____ from both _____ and ______ when the lessor is recording the sale.

Answer 20

Lessee:
Leased Asset (PV of the annuity)
          Lease Liability (PV of the annuity)

Lessor:
Lease Receivable (Nom Val of payments + Nom Val RV)
COGS (BV of Asset - UGR(which the is PV of RV))
Unearned Int (Plug)
Equipment (BV of Asset)
Sales (FV of Asset (which is PV of the annuity + PV of the RV) - UGR)

Question 21

BPO lessee and lessor journal entries would include…

Answer 21

Lessee:
Leased Asset (PV of the annuity + PV of the BPO)
          Lease Liability (PV of the annuity + PV of the BPO)

Lessor:
Lease Receivable (Nom Val of payments + Nom Val BPO)
COGS (zero)
Unearned Int (Plug)
Equipment (Credited for Lessee amount)
Sales (zero)

Question 22

When approaching a lease question first determine whether is it a ______ or an ________ lease. Next determine do I have to draw a _____ to answer the question. Third find out what is the treatment of the ______.

Answer 22

Operating or capital, table, residual