Chapter 10 - Leases

Question 0

WHAT ARE THE 3 STEPS TO ACCOUNT FOR A FINANCE LEASE?

Answer 0

1. Record the acquisition of the asset (NCA) and equal liability (finance lease) at the lower of PV or MLP:
   DR Non-current asset
   CR Finance lease liability
2. Charge annual depreciation on the asset on a SL basis at the shorter of the lease period or the UEL:
   DR Depreciation expense
   CR Accumulated depreciation
3. Record the lease payments and accrued interest according to the lease agreement:
   DR Finance lease liability
   CR CashDR Finance charge
   CR Finance lease liability
4. Create the lease liability table.

Question 1

WHAT THINGS MAKE A LEASE A FINANCE LEASE?

Answer 1

• ownership transferred to leasee at end of lease term
• lease term = majority of useful life
• at start of lease the PV is very similar to MLP
• possibility of Peppercorn rent
• the leasee can buy asset at end of lease at bargain price
• only the lessee can use the asset without major modification
• if lesses cancel lease, must pay for losses associated with cancelation

Question 2

THE LEASE LIABILITY TABLE

ARREARS

Answer 2

B/f | Interest | (Payment) | C/f

Year 1
Year 2
Year 3
Year 4

Question 3

THE LEASE LIABILITY TABLE

ADVANCE

Answer 3

B/f | (Payment) | Balance | Interest | C/f

Year 1
Year 2
Year 3
Year 4

Question 4

INTEREST EXPENSES:

THE ACTUARIAL METHOD

Answer 4

X% x balance of liability outstanding

X = implicit rate of interest

Question 5

INTEREST EXPENSES:

THE STRAIGHT LINE METHOD

Answer 5

The charge is allocated equally over the over the period of the lease.

DISADVANTAGES:
It results in an equal finance charge each year, even though the outstanding liability is gradually reducing.

Question 6

INTEREST EXPENSES:

THE SUM OF DIGITS METHOD

Answer 6

(n(n+1))/2

Arrears: n = number of repayments
Advance: n = number of repayments - 1

Question 7

HOW DO YOU CALCULATE THE TOTAL FINANCE CHARGE?

Answer 7

Total lease payments

Amount borrowed: FV or MLP

Question 8

DOUBLE ENTRY

LEASE DEPOSIT

Answer 8

DR Finance lease liability

CR Cash

Question 9

HOW DO YOU ACCOUNT FOR AN OPERATING LEASE?

Answer 9

You recognise this in the income statement on a straight line basis over the term of the lease:

I/S charge = (Total payments made)/(Lease term)

Any difference between amounts charged and amounts paid will be prepayments or accruals.