Chapter 5: Leases & Bonds Flashcards
When are the payments due in an ordinary annuity? How many interest periods are there?
end of period
equal to number of payments
When are the payments due in an annuity due? What makes up the first payment? How many interest periods are there?
beginning of period
all principal/no interest
one less than the number of payments
What is an operating lease?
Lessee uses asset in a rental agreement (no transfer of ownership)
(Lessee) How do you treat lease rent expense?
Expenses over the lease term (straight-line)
(Lessee) How do you treat lease bonus?
Prepayment for future expenses
capitalized as an asset & amortized over life of lease (straight-line)
(Lessee) How do you treat leasehold improvements?
Capitalized and amortized over the lesser of the remaining life or improvement life
(Lessee) How do you treat rent kicker?
expensed as incurred
(Lessee) How do you treat refundable security deposit? Non-refundable?
reported as receivable until refunded
capitalized as PPD rent expense
(Lessee) How do you treat free/reduced rent?
Take total rent expense & divide evenly over each period (straight-line)
(Lessor) How do you treat cost of property?
PPE & depreciated over asset’s useful life (NOT lease life)
(Lessor) How do you treat rental income?
income over lease term (straight-line)
(Lessor) How do you treat refundable security deposits? Non-refundable?
reported as liability until refunded to lessee
deferred (unearned revenue) until considered earned
(Lessor) How do you treat lease bonuses?
deferred (unearned income) & amortized over life of lease
(Lessor) How do you treat free/reduced rent?
divide total rental income evenly over all periods
What is a capital lease? What does a lessor call this type of lease under GAAP & IFRS?
treated as purchase/sale with ownership & substantially all benefits transferred
GAAP - Sales-type or direct financing
What is the criteria for Lessee capital lease? When can’t you use the N or S?
“OWNS”
Ownership Transfers (at end of the lease)
Written buyout/bargain purchase option
Ninety % property FV covered by PV of lease payments
Seventy-five % asset life included in lease term
If lease begins within last 25% of original economic life of property.
What is the Lessor additional criteria for recognizing sales type lease?
“LUC”
Lessee owns the leased property (meets OWNS)
Uncertainties do not exist
Collectablility reasonably predictable
What is a sales-type lease? How many profits do you recognize?
FV of leased property differs from CV
2 profits
Gain on sale & interest income
What is a direct financing lease? How many profits do you recognize?
FV equals CV
1 Profit
Interest Income
What criteria make up a finance lease for IFRS?
“OWES FACS”
Ownership transfers (end of lease) Written bargain purchase option Economic life (major part) Substantially all of the years (life) Fluctuation in g/l from residual payments to lessee Ability to continue to rent at lower Market Cancel the lease (lessee can cancel) Specialized
How does the lessee record lease in finance lease? What is the capitalized amount?
Record lease as fixed asset and related liability at capitalized amount
Lesser of FV of asset at inception or the cost
What do you include in the cost of the finance leased asset (lessee)? What do you exclude?
PV of all payment lessee is obligated to make
required payment, bargain purchase, guaranteed residual value
executory costs & optional buyout
What are the depreciation periods for finance assets (GAAP)? (IFRS)?
GAAP: O or W then estimated economic life
GAAP: N or S then use lease term
IFRS: lesser of the lease term or useful life of asset
What is the gross investment (lease receivable) under sales type lease?
Lease payments (include BPO & guaranteed value) \+ Unguaranteed value (FV at end)
