Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Intermediate Accounting II > Chapter 20 - Accounting for Leases > Flashcards

Chapter 20 - Accounting for Leases Flashcards

1
Q

What is the definition of a lease

A

a contractual agreement between a lessor and a lessee, that gives lessee the right to use specific, property owned by the lessor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are the benefits of Leasing for the Lessee

A
  • No (or low) down payment
  • Fixed rates
  • Avoid risk of ownership
  • Flexibility
  • Tax advantages
  • Less Costly financing
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the benefits of leasing for the Lessor

A
  • Increased Sales
  • Tax advantages
  • Residual value retained
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What should a lessee classify the lease based on?

A

If the arrangement is effectively a purchase of the underlying asset

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is a finance lease

A

a lease where the lease transfers control of the underlying asset to the leasee

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

When is it determined that a lease is a financing lease

A

If one of the lease classification tests are triggered

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are the lease classification tests

A

1. Transfer of ownership

#2 Bargain Purchase Option Test
#3 Lease Term Test
#4 PV Test
#5 No alternative use test

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is the bargain purchase option test

A

when the lease allows the lessee to purchase the asset for a price that is significantly less than the fair value at the date the option becomes execrable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

what is the lease term test

A

if the lease term is more than or equal to 75% of the assets economic life then it is a finance lease

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

what is a bargain renewal option

A

At the commencement of the lease if it is reasonably certain that the lessee will exercise the option to renew… this extends the lease life period

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the PV Test

A

If the PV of the lease payment is greater than or equal to 90% of the FV then the test is triggered

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are the lease payments that can contribute to the the PV test

A

-Fixed payment
-Variable payments (can be known or unknown)
-Guaranteed Residual
-Payments related to purchase or termination options that the lessee is reasonably certain to exercise

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

what rate should you use first for leases then what should you use if that one is not known

A

implicit, then incremental borrowing rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is the No alternative use test

A

If there is no alternative use for the asset besides to be used for the lessee than it is a financing lease

  • if it is assumed the lessee uses all the benefits from the asset then they essentially have purchased the asset
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is recorded for a finance lease for the lessee

A
  • ROU Asset
  • Lease Liability
  • Interest Expense
  • Amortization Expense
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

How do you record the J.E at lease inception

A

Dr. ROU Asset
Cr. Lease Liability (PV of all expected payments)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

what method is used to calculated interest expense

A

effective interest method on the lease liability

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What goes into the calculation of the Lease liability

A
  • PV of lease payments
  • PV of difference between expected and guaranteed residual if there is one
  • PV of probable bargain purchase option
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What goes into the calculation of the ROU asset

A
  • lease liability + initial direct costs, prepayments and lease incentives
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is the lease called when it is a financing lease for the lessor

A

Sale-Type Lease

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What does the lessor record for a sales-type lease

A

Lease inception:
Lease receivable
COGS
Sales Revenue
Inventory

Pmts:
Cash
Lease Receivable

Recognize interest
Lease Receivable
Interest Revenue

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

How is the lease receivable computed for the lessor

A

PV of PMTS + PV of Residual (whether guaranteed or not)

*amount they would want to recover

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

what is different in the lessee accounting for finance vs operating lease

A

there is a single lease expense that is the same each period. (add up payments and divide by the number of payments to get expense)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

what two thing balance lease expense in a journal entry and how are they calc.

A

the interest expense is calculated based on the effective interest method and amortization is the plug

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

what does the lessor recognize under the operating method

A
  • Asset continues to be recognized on the balance sheet (doesn’t transfer control of the item)

-recognizes unearned lease revenue at inception

-depreciates over useful life

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

what is a short term lease?

A

a lease that at it’s commencement date has a lease term of 12 months or less

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

How does lessor calculate payments to be recieved

A

FV of equipment
Less: (PV of residual value)

= amount to be recovered through payments / PV factor

28
Q

why does a lessor recognize unearned lease revenue in an operating leases

A

because they have received cash but have not satisfied their performance obligation

29
Q

what is the journal entry for a short term lease

A

lease expense
cash

30
Q

If a lease has an original term for 12 months but has a renewal option that is reasonably certain to exercise then can it be a short term lease?

A

no

31
Q

What are executory costs

A

normal expenses associated with owning a leased asset such as property insurance and property taxes

32
Q

if a lessor includes executory costs that are fixed payments required by the lessor how should they be accounted for

A

they should be included in lease payments for purpose of measuring lease liability

  • think of zena adding water bill into our lease payments
33
Q

if the executory costs are payments made directly to the taxing authorities or insurance provider how are they accounted for

A

they are expensed as incurred

*think of paying monthly energy bill to keep house going

34
Q

How do lease prepayments, incentives and initial direct costs prior to the lease affect its accounting

A
  • lease prepayments increase the ROU asset (debit ROU)
  • Lease incentives decrease the ROU asset (dr. cash cr. ROU)
  • Initial direct costs incurred increase the ROU asset
35
Q

what are initial direct costs?

A

incremental costs of a lease that would not have been incurred has the lease not been executed

36
Q

if lessor is paying initial direct costs how would they account for it?

A

Operating: They would defer the initial direct costs and amortize them as expenses over the term of the lease (capitalize them amortize)

Sales Type: expenses initial direct costs at lease commencement

*Match expense to revenue recognition

37
Q

What is a bargain purchase option

A

allows the lessee to purchase the leased property for a future price that is substantially lower than the asset’s expected FV

38
Q

What changes in the accounting when a bargain purchase option exisits.

A
  1. The lessee must increase PV of lease payments by the PV of the option price
  2. The asset is amortized over economic life not lease term
39
Q

when are the two scenarios where the lessee benefits from the asset beyond the term of the lease

A
  1. Bargain purchase option
  2. Transfer of ownership
40
Q

how do you determine how much the amount to be recovered through payments for the lessor will be

A

FV of asset
less: what they are going to get back from the lessee (could be residual or payment for asset)

41
Q

For a residual value if the expected residual value is equal to or greater than the guaranteed residual then…

A

the lessee should not include residual into lease liability

42
Q

For a residual value if the expected residual value is less than the guaranteed value then…

A

the difference between the two should be computed in the computation of the lease liability

43
Q

what does a lessee do with an unguaranteed residual

A

nothing, they do not compute it into PV test or in lease liability they simply just return the asset without any other payment

44
Q

If a sales-type lease and there is an unguaranteed residual value how does this affect the accounting

A
  • Sales revenue and COGS is recognized only for the portion of the asset in which recovery is assured
  • ## Sales Revenue and COGS are lowered by the present value of the unguaranteed residual
45
Q

how does Gross profit change when the residual is ungauranteed

A

it doesn’t change because sales revenue and COGS are decreased by the same amount

46
Q

If a operating lease and there is an unguaranteed residual value how does this affect the accounting

A

there are no changes - they often go together

47
Q

What is a sale lease back

A

when a company (seller-lessee) transfers an asset to another company (the buyer-lessor) and then leases that asset back from the buyer-lessor

48
Q

Why do (seller-lessees) engage in sale-leaseback transaction

A
  1. can use the cash that would otherwise be tied up in property to expand operations
  2. Can structure the lease arrangement so issues such as repurchase provisions, refinancing issues, and conventional financing costs are manimized
  3. May receive a tax advantage in that entire rental payments are tax deductible
49
Q

Why would (buyer-lessor engage in a sale-leaseback

A
  • A higher rate of return than traditional financing
  • Protected from downturn in real estate market and may have an inflation hedge
50
Q

If control has passed from seller to buyer for a sale-leaseback then…

A

true sale has occured… operating lease

51
Q

if control has not passed from seller to buyer in a sale leaseback then…

A

failed lease… transaction recorded as a financing “note payable”

52
Q

If there is a sale transaction in a sale-leaseback then what accounting is necessary

A

Gain or loss is appropriate

  1. Record sale

Cash
Accum. Depreciation
Inventory
Gain (or loss)

  1. Account for operating lease
53
Q

What happens when there is a failed sale-leaseback in the eyes of the seller

A

-do not reduce the carrying value of the building
-keep depreciating
-recognize sale proceeds as a financial liability

54
Q

what would be the journal entry for a failed sale-leaseback

A

Cash
Note Payable

55
Q

What is a direct financing lease

A

a part of a sale-leaseback when the lessor relinquishes control of the asset to the lessee but there is a third party involved

-lessors use a third lease classification

56
Q

what is the main difference between a direct financing lease and a sales-type lease

A

the profit on the sale…

sale-leaseback: profit immediately recognized

direct financing lease: profit is deferred and recognized over life of lease

57
Q

what is journal entry for a direct financing lease

A

lease receivable
deferred gross profit
inventory

58
Q

How is a finance lease presented on the balance sheet and income statement for lessee

A

B/S
-ROU Asset
-Lease Liability

I/S
-Ammort Expense
-Interest Expense

59
Q

How is an operating lease presented on the balance sheet and income statement for lessee

A

B/S
-ROU Asset
-Lease Liability

I/S
-Lease Expense

60
Q

How is an operating lease presented on the balance sheet and income statement for lessor

A

B/S
-continue to recognize assets as PPE

I/S
- revenue on straight line
-depreciation expense

61
Q

How is a sales-type lease presented on the balance sheet and income statement for lessor

A

B/S
- Lease receivable
-Derecognize the leased asset

I/S
-interest revenue
-selling profit/loss

62
Q

What are the disclosures for leases

A

There are both qualitative and quantitative footnotes that need to be made by lessor and lessee

63
Q

What are the quantitative disclosures about leases for the lessee

A

-least cost
-how costs are segregated
-operating and short term lease costs
-weighted average remaining lease term and discount rates
- maturity analysis

64
Q

What are the qualitative disclosures about leases for the lessee and lessor

A
  • nature of the lease
  • how variable pmts are determined
    -terms and conditions to extend lease
    -info about assumptions or judgements
65
Q

What are the quantitative disclosures about leases for the lessor

A

-lease-related income
-income from variable lease payments
- components of the net investments
- maturity analysis
- management approaches for risk with residual value

66
Q
A

Intermediate Accounting II (5 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions