Chapter 5 Accounting for leases

Question 1

How is depreciation determined on a lease?

Answer 1

If it is a capital lease it will be depreciated using the same term as the lease.

Question 2

How is a bargain purchase option recorded with the lease?

Answer 2

You include the present value of the bargain purchase in the beginning present value of the lease.

Question 3

How do you determine how much interest expense to include?

Answer 3

Interest rate x remaining present value.

Question 4

When is a gain on sale-lease back transaction deferred?

Answer 4

Recognition of a gain resulting from the sale in a sale-leaseback should be deferred when the seller-lessee retains the right to substantially all of the remaining use of the property (as in a capital lease)

Question 5

when is a gain on sale-lease back transaction recognized?

Answer 5

When the seller-lessee retains the right to substantially all of the remaining use of the property.

Question 6

How do you determine the amount of interest earned?

Answer 6

Total cashflow less the present value.

Question 7

When is a non-refundable lease bonus recognized?

Answer 7

Over the life of the lease

Question 8

How is intreset revenue determined?

Answer 8

the amount of lease still on the books at year end times the interest rate, multiply by the percentage of the year.

Question 9

How is the guaranteed residual value recorded at the inception of a capital lease?

Answer 9

It is in effect an additional lease payment and must be included in the calculation of the present value of the minimum lease payments.

Question 10

How is revenue recorded, even if 1 period is given free.

Answer 10

You divide total revenue by the amount of periods, including any free periods.

Question 11

What is the term % requirement for a lease to be classified as capital?

Answer 11

It must equal 75% of the leased equipments economic life.

Question 12

Are taxes included when calculating lease liability?

Answer 12

No, they are expensed when paid

Question 13

How do you determine profit on a finance lease?

Answer 13

The excess present value of the selling price over its costs is recorded as profit.

Question 14

How do you record lease income?

Answer 14

Divide the total amount expected by the total life of the lease, no matter if any periods are given free.

Question 15

How do you record depreciation on a title transfer/bargain purchase capital lease?

Answer 15

(Lease amount - residual value) / life of asset

Question 16

How are gains recorded on a sale-lease back transaction?

Answer 16

Any gain on “Major” (capital lease) is differed while gains on minor leases are recognized.

Question 17

Is bargain purchase capitalized along with the lease?

Answer 17

Yes

Question 18

What are the rules of a capital lease?

Answer 18

1. The lease transfers ownership to the lesse by the end of the lease term.
2. The lease contains a bargain purchase option
3. The present value at the beginning of the lease term of the “minimum lease payments’ equals or exceeds 90% of the fair value of the lease property
4. The lease term is 75% or more of the estimated economic life of the leased property.

Question 19

When should gain on a sale-lease back be deferred?

Answer 19

If its accounted for as a finance lease or if the sales price is above fair value on an operating lease.