capital leases Flashcards
executory costs
property taxes
insurance and maintenance
these are expensed by lessee in a capital lease and lessor in a operating lease
if total lease payments are 1600 and 300 are executory costs, then what do i Capitalize?
1300
the 300 would be expensed at inception of lease
minimum lease payments are
annual lease payments
rental payments under bargain newel options
bpo
guaranteed residual value.
these are used to determine if pv payments are greater than 90% cash price of leased asset
lessor implicit interest rate
the rate earned by the lesser on the lease
lessee’s incremental borrowing rate
rate on similar debt
what rate do i use?
use the smaller of lessors implicit rate and lessees incremental rate. LOOK AT RATES! not pvoa. this would be used for criterion #4. 90% fv
capital lease criteria for lessee
- title transfer-installment purchase implied
- bpo-allows lessee to purchase asset at end of lease term for less than fv
3.lease term is >= 75% of the assets remaining useful life at inception. EX
useful life is 10 years
after 3 years asset is leased for 6 years
6/7=75%
4.pv of min lease payments is >=90% of the fv of the asset at inception.
the criteria is the same for lessee and lessor but lessor must meet an extra two criteria to be classified as a capital lease.
lease payments are collectible
no material cost uncertainties for the lessor(guarantee against obsolescence)
if fv does not equal bv then what type of lease is it for the lessor?
sales type lease
there are two types of capital leases
sales type lease and direct financing lease
lessee journal entries for sales type lease
1/1/x1 (annuity due lease)
leased asset (pv of payments) 17
Lease Lia 17
Lease lia 5
Cash 5
(lease payments)
12/31/x1
interest expense (17-5*.1) 1.2
lease lia 1.2
Depn Exp (S/l) (17/4 years) 4.25
AD 4.25
1/1/x2
Lease Lia 5
Cash 5
12/31/x2
Interest expense can be multiplied by lease lia balance 17-5-1.2-5=5.8*.1=.58
Int exp .58
Lease Lia .58
Lessor Journal Entries for Sales type lease
1/1/x1
Lease Receivable (gross) (4*5) 20
cogs(cost) 12
unearned interest(20-17) 3
asset(take off at cost) 12
sales (fv) 17
cash 5
lease receivable 5
(1st payment received by lessee)
*gm 17-12=5
12/31/x1
interest revenue 1.2
unearned interest 1.2
(20-3-5*.1)
1/1/x2
cash 5
lease rec 5
12/31/x1
interest revenue .82
unearned interest .82
net reachable *.1
20-5-5-3+1.2=8.2*.1=.82
0r net receivable*.1
criteria 1 and 2 is only used for
land leases
if land and building are leased when do you separate them?
if fv of land is >25% of fv then separate lease and land lease is operating lease and building is capital lease.
contingent rental
changes in lease payments that result from some future event other than passage of time. recognize as revenue or expense as they occur. not used in rent expense/revenue for operating leases and not included in min lease payments.
depreciation is always calculated using the
initial capitalized amount at inception
abe co leased machinery
economic useful life is 10 yrs
for tax purposes depreciable life is 7 yrs
the lease is for 8 yrs
abe can purchase the equipment for fav at the end of the lease term
what is the depreciable life for financial reporting?
what if there was a bargain purchase option?
- 8 years
because criteria 3 is met for it to be a capital lease
8/10=80% and 80>75 - 10 years
the assumption is the lessee will take advantage of that option and hold the asset for its expected economic life
on 12/30/x1 the parties sign a 4 year lease with the following data.
4 annual lease payments of 20,985 due at the end of the year.
end of lease term 12/31/x5
interest rate 10%
pvoa 3.486
pv .683
fv of asset at inception 80k
useful life 6 yrs (s/l depn and 5k residual)
at end of lease lessee can purchase asset for 10k. fv is estimated to be 25k.
20,9853.486 + 10k.683=80k
criteria 4 is met 80pv/80fv=100%
12/31/x1- Lessee
leased asset 80
lease lia 80
lease lia 20,985
cash 20,985
12/31/x2
depn exp (80-5/6) 12.5
AD 12.5
*because this lease met the bpo criteria we are using the useful life of the asset and not 4 yrs
12/31/x1-lessor
lease receivable (4*20,985+10k) 93,940
unearned interest(plug) 13,940
asset 80k
unguaranteed residual question 1/1/x1 sign lease annual lease payments due at 12/31 of 23,083 12/31/x1 end of lease term lessee incremental rate 10% pvoa 3.17 pv .6830 lessor implicit rate 12% pvoa 3.037 pv .6355
fv of asset at inception 80k(cost)
useful life at inception 6 yrs (s/l 5k residual value.
at end of term asset reverts to lessor and is set 10k value.
lessor
230833.17=73183
+10k.683=6830
=80k
pv of min lease payments
73pv/80fv=91% so its a capital lease
Lessor 1/1/x1
lease receivable(4*23083+10k) 102332
unearned interest (plug) 22332
asset 80k
Lessee
leased asset 73183
leased lia 73183
depn exp (73170/4) 18293
AD 18293
(will only use for 4 years)
there were three more questions i skipped. go back
sale leaseback
owner of an asset sells it and immediately buys it back
major leaseback
pv min lease payments>=90% of fv
gain on sale is deferred and recognized over lease term
major leaseback gain -capital lease
defer and classify gain as a contra leased asset account
amortize the contra account reducing depn expense
major leaseback gain-operating lease
defer and classify gain as a liability
major leaseback example
on 1/1/x1 a firm sells a plant asset for 24 (cost 32 and ad 18)
remaining useful life is 5 yrs (S/L)
asset is leased back for 5 years
annual year end lease payments based on selling price and a 10% implicit rate are(24/3.791) 6,331.
gain on sale 10,000. (24-14)
if this is a capital lease
cash 24
ad 18
asset 32
def gain 10
(sale of asset)
leased asset 24
leased lia 24
depn expense (24/5) 4800 AD 4800
deferred gain 2000
Depn Expense (10/5) 2000
(the gain gets recognized through the reduction of DEPN expense each year)
if this was an operating lease
cash 24
ad 18
asset 32
Gain Lia 10
(sale of asset)
deferred gain Lia 2000
Rent Expense 2000
