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Acct 302 > Ch 21 > Flashcards

Ch 21 Flashcards

1
Q

What is a lease?

A

A contractual agreement between lessor and a lessee

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2
Q

What does a lease give the lessee the right to?

A

The right to use specific property that is owned by lessor for a specified period of time

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3
Q

In exchange for the right to use lessors asset, what does the lessee do?

A

Makes rental payments over lease term to lessor

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4
Q

Who are the largest players in the leasing business?

A

Banks

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5
Q

What are captive leasing companies?

A

They are subsidiaries whose primary business is to perform leasing operations for a parent company

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6
Q

What are the 6 advantages of leasing?

A
  1. 100% financing at fixed rates
  2. Protection against obsolescence
  3. Flexibility
  4. Less costly financing
  5. Tax advantages
  6. Off balance sheet financing
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7
Q

What are the views on capitalization of leases?

A
  1. Do not capitalize any leased assets
  2. capitalize leases that are similar to installment purchases
  3. Capitalize all long term leases
  4. Capitalize form leases where penalty for nonperformance is substantial
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8
Q

operating leases should be capitalized.

True or false?

A

False, companies should account for them as rental payments and receipts

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9
Q

In order to record a lease As a capital lease, what kind of lease must it be?

A

Noncanceable

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10
Q

What are the 4 criteria’s for the capitalization of a lease. (Lessee)

A
  1. Lease transfers ownership of property to lessee
  2. Contains bargain purchase option
  3. Lease term is equal to 75% or more of estimated economic life of leased property
  4. PV of minimum lease payments (excluding executary costs) equals or is > than 90% of fair value of leased property
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11
Q

Do you have to meet all criteria for a capital lease?

A

No just one or more

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12
Q

What is a bargain purchase option?

A

Allows lessee to purchase leased property for a price that is significantly lower than the property’s expected FMV at the date the option becomes exerciseable

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13
Q

The difference between option price and expected fair value must be large enough to make exercise of option reasonably reassured

A

Yes

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14
Q

If a lease period is equal to or exceeds 75% of the assets economic life then who bares most of the risk and rewards of ownership?

A

Lessee

It is transferrd from lessor to lessee

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15
Q

Lease term is generally considered as what?

A

Fixed, noncanceable term of lease

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16
Q

What is a bargain renewal option?

A

Allows the lessee to renew the lease for a rental that is lower than the expected fair rental at date the option becomes exercisable

17
Q

Determine the PV of minimum lease payments involves 3 important concepts

A
  1. Minimum lease payments
  2. Executory cost
  3. Discount rate
18
Q

Minimum lease payments include

A
  1. Minimum rental payments
  2. Guaranteed residual value
  3. Penalty for failure to renew or extend lease
  4. BPO
19
Q

What are executory costs?

A

Leased tangible assets incur insurance, maintenance, and tax expenses

20
Q

The minimum lease payments are calculated how?

A

The PV is computed of minimum lease payments using incremental borrowing rate

21
Q

If lessee knows the implicit interest rate of others and it is less than their own incremental borrowing rate then you what?

A

Use the implicit rate

22
Q

What is the interest rate implicit in the lease?

A

It is the discount rate that when applied to minimum lease payments and any ungarenteed residual value accruing to lessor causes aggregate PV to equal FV of lease property to lessor

23
Q

Lessee records a leased asset and a lease liability at the lower of

A
  1. PV of minimum lease payments (excluding executory costs)

OR

  1. FV of leased asset at inception of lease
24
Q

If there is a transfer of ownership or contains BPO, how is the asset depreciated?

A

Over economic life of asset

25
Q

If there is no owner transfer or no BPO, how is asset depreciated?

A

It is depreciated over term lease

26
Q

What is the effective interest method used to allocate?

A

Each lease payment between principal and interest

27
Q

What does the effective interest method produce?

A

A periodic interest expense that is equal to a constant % of CV of lease obligation

28
Q

When using effective interest method to capital leases, what discount rate must be used?

A

The same discount rate must be used as the discount rate that determines PV of minimum lease payments

29
Q

FASB requires lessees and lessors to disclose certain information about leases in FS or in notes. This includes

A
  1. General description of nature of leasing arrangements
  2. Nature timing and amount of cash in and outflows associated with leases including payments to be paid or recieved for each of five succeeding years
  3. Amt of lease rev and exp reported in IS each period
  4. Descript and amount of leased assets by major balance sheet classification and related liabilities
  5. Amounts receievale and unearned rev under lease agreements

Acct 302 (7 decks)

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