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ACCT 343 > CHP 20 - Leases > Flashcards

CHP 20 - Leases Flashcards

1
Q

CHP 20 - Leases

  • calculator @begin period,1
    • pmt, -fv = 0 or guaranteed res value
A
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2
Q

QUIZ 1 Questions

A
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3
Q

IMPORTANT

A

1) ASPE = classification approach
2) IFRS = contract based approach (right of use)
3) MRP = minimum rent payments = determined by lessor
4) Guaranteed residual value = determined by lessee
5) Lessee doesn’t consider unguaranteed res value in PV of MLP calculations but lessor does
6) Executory costs = insurance/maintenance/property costs, not included in MRP

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4
Q

IMPACT

A

1) higher res value = lower rent pmt
2) operating lease = lower D/E, lower interest @begin, higher inc @begin, higher current ratio
3) capital lease = higher D/E, higher interest @begin, lower inc @begin, lower current ratio

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5
Q

Operating Lease

A

1) don’t control benefits
2) don’t record on B/S
3) I/S = interest expense
4) CF = operating CF

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6
Q

Capital Lease

A

1) control benefits
2) record on B/S
3) I/S = depreciation + interest
4) CF = financing and operating CF

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7
Q

Lessee criteria (ASPE vs IFRS)

A
  1. ASPE (4) - one has to be met

1) Transfer ownership/control benefits
2) Bargain purchase option (price < or equal to 90% of fair value )
3) Lease term is > or equal to 75% (n/estimated life)*
4) PV of MLP is > or equal to 90% of fair value

  1. IFRS (same 4) but no 75%/90%
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8
Q

Lessor criteria (ASPE vs IFRS)

A
  1. ASPE (4 same + 2 add where both met)

1) Lessee credit normal
2) Cost of asset sold must be known

  1. IFRS (4 same + 1 add have to be met) + 2 types
    1) requires capitalization of lease if asset is specialized

2 types

1) Direct financing (carry amount = fair value)
2) Sales type (carry amount doesn’t equal fair value)

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9
Q

3 criteria MLP (3)

A

1) Lessor calculates it
2) rate = implicit
3) rate not always disclosed, if not then use incremental borrow rate

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10
Q

3 forms of MLP (3)

A

1) Guaranteed Residual Value
2) Bargain Purchase option (over economic life)
3) Penalties failing to renew

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11
Q

4 PV of MLP criteria (4)

A

1) MRP
2) guaranteed res value
3) bargain purchase option
4) penalties failing to renew lease

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12
Q

PV of MLP calculations Lessor (ASPE vs IFRS)

A
  1. ASPE

1) choose lower of fair value and PV
2) PV (i/y = lower of implicit and incr rate)

  1. IFRS

1) choose lower of fair value and PV
2) @implicit but use incremental if not known

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13
Q

TO DO: Sales Leaseback (sell asset then lease it back) ASPE vs IFRS

A
  1. ASPE
    sales type, direct financing, operating lease, defer profit from sale and amortize in proportion to rental payments over lease term
  2. IFRS

right of use, operating lease, gain recorded @inception for seller/lessee, carrying amount (PV of MLP - deferred gain) recorded by buyer/lessor

  1. Notes 20-7 (ASPE) , 20-8 (IFRS)
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14
Q

TO DO: Real estates Leases (ASPE)

A

1) ASPE, capital lease, transfer of ownership or bargain option present, lessee capitalize @fair value, land and building separate
2) don’t transfer ownership and fair value of land is minor, land and building are single unit (economic life = building life)
3) don’t transfer ownership and fair value of land is significant, lessor land and building separate

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15
Q

Example (Lessor, guaranteed res value, bargain purchase option, choose fair value over PV of MLP, calculate pmt)

A
  1. PV of MLP

2. pmt (n,implicit rate, -pv = fair value, fv = guaranteed res val or bargain option or unguaranteed (if lessor)*, 1)

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16
Q

Example (ASPE, Lessee, capital lease, PV of MLP, guaranteed residual value, PV calculations, journal entry)

A
  1. Lessee PV of MLP

1) choose lower of PV and fair value
2) PV (choose lower of implicit and inc borrow rate)
3) PV of MLP (n=lease term, I/Y = lower of impli and incr, -pmt = pmt given, fv = 0, 1)
4) with guaranteed res value (-fv = guaranteed res value)

  1. Journal entries

Jan 1/1

Dr Leased Equipment (lesser of fair val and PV)
Cr Lease obligation

Dr Lease obligation (pmt)
Cr Cash

Dec 31/1

Dr Dep Exp (lesser amount - res val)/n
Cr Acc Dep

Dr Interest exp (lesser amount - res val)/n
Cr Int pay

Jan 1/2

Dr Int Payable (same as dec31/1)
Dr Lease obligation (plug)
Cr Cash (pmt)

Dec 31/2

Dr Dep exp (same)
Cr Acc dep

Dr Int exp (lower amount - pmt - lease obligation jan 1/2)*lower rate
Cr Int pay

17
Q

Example (IFRS, Lessor, capital lease –> direct financing (equal) , sell price, lease price, journal entry)

A 
Dr Lease pmts receivable (lease price) 
Cr Inventory (sell price) 
Cr Unearned int inc (plug)

*Lessor considers/includes (+) unguaranteed residual value in lease price

18
Q

Example (IFRS, Lessor, capital lease –> sales type (not equal), sell price, lease price, cost, interest, journal entry)

A 
Dr Lease pmts receivable (sell price + int) 
Dr COGS (cost) 
Cr Sales (sell price) 
Cr Inventory (cost)  
Cr Unearned int inc (int)
  • carry amount = cost
  • fair value = sell price
19
Q

Example (ASPE, Lessee, capital lease, prorate, steps, journal entries)

A
  1. Is it capital lease ? Only needs to meet 1 of 4 criteria
  2. If yes, choose lower of fair value and PV of MLP
  3. PV of MLP (lower of implicit and incr rate)
  4. Journal Entries

Jan 1/1

Dr Lease Equipment (lower of fair val and PV)
Cr Lease Obligation

Dr Lease obligation (pmt)
Cr Cash

April 1/1 (x=3/12 jan 1–>apr 1)

Dr Lease obligation 
Dr Interest (carry amt-pmt)*lower rate 
Cr Cash (pmt)

Dr Dep Exp (carry amount/lease term)*x/12
Cr Acc Dep

July 1/1

Dr Lease obligation (plug)
Dr Interest (carry amt-lease obligation april-pmt)*lower rate 
Cr Cash (pmt)

Dr Dep Exp (same)
Cr Acc Dep

20
Q

Example (ASPE, Lessor, capital lease –> direct financing, Journal entries)

A
  1. Journal entries

Jan 1/1

Dr Lease pmts receivable (total pmts) 
Cr Unearbed int inc 
Cr Asset (carrying amount) 
Dr Cash (pmt) 
Cr Lease pmt receivable

April 1/1

Dr Cash (pmt) 
Dr Unearned int inc (plug) 
Cr Lease pmts receivd (pmt) 
Cr Int inc (total pmts-unearned int inc jan1/1-pmt)*implicit rate

July1/1

Dr Cash (pmt)
Dr Unearned int inc (plug)
Cr Lease pmts receivd (pmt)
Cr Int inc (below)

(unearned int inc jan1/1 - unearned int inc april1/1)] * implicit rate

21
Q

Example (IFRS, Lessor, capital lease –> sales type, journal entry)

A 
Dr Lease pmts receivable (total pmts)
Dr COGS (carry amount) 
Cr Equipment (carry amount) 
Cr Sales Revenue (fair value) 
Cr Unearned int inc (total pmts - fair value)
22
Q

Example (IFRS, Lessor, capital lease –> direct financing,guaranteed/unguaranteed/ bargain, journal entries)

A

Jan1/1

Dr Lease pmts receivable (total pmts+guaranteed or unguaranteed or bargain) 
Cr Inventory (fair value = carry amount) 
Cr Unearned int inc (plug)

Jan 1/2,3,4

Dr Cash (pmt) 
Cr Lease pmts received

Dec 31/1,2,3

Dr Unearned int inc (fair value-pmt)*implicit rate
Cr Int revenue

Dec 31/4

Bargain option:

Dr Cash (bargain option) 
Cr Lease pmts received

Guaranteed or unguaranteed:

Dr Equipment (guaranteed or unguaranteed) 
Cr Lease pmts received

*If sold price < guaranteed or unguranteed

Dr Cash (sell price)
Dr AR from lessee (plug) 
Cr Equipment (guaranteed or unguaranteed)

*If sold price > guaranteed or unguranteed

Dr Cash (sell price)
Dr Gain on sale (plug) 
Cr Equipment (guaranteed or unguaranteed)
23
Q

Example (IFRS, Lessor, capital lease –> sales type, guaranteed/unguaranteed/ bargain, journal entries)

A
  1. Guaranteed or bargain

Jan 1/1

Dr Lease pmts receiv (total pmts+guaranteed or bargain)
Dr COGS (carry amount)
Cr Equip (carry amount)
Cr Sales Revenue (fair value)
Cr Unearned int inc (total pmts - fair value)

  1. Unguaranteed

Jan 1/1

1) PV (n,implicit,pmt=0, -fv(unguaranteed),1)
2) Jan 1/1

Dr Lease pmts receiv (total pmts+unguaranteed)
Dr COGS (carry amount-pv)
Cr Equip (carry amount)
Cr Sales Revenue (plug)
Cr Unearned int inc (total pmts - fair value)

24
Q

Example Paper Notes (Lessee, Journal entries for guaranteed res vs unguaranteed res vs bargain)

25
Q

Example (Lessee, amortization table with guaranteed res or bargain option
, n=4 -> 5 periods table)

A

Period | open | pmt | interest | princip | end

1. Period 1
open = fair v or PV
pmt = pmt   
interest = 0
principal = pmt - interest 
end = open - principal
  1. Period 2
    open = end#1
    interest = open x imp rate
  2. Period 5
pmt = 0
princ = 0 
end = guaranteed res or bargain
26
Q

Example (Lessee, amortization table with unguaranteed res, n=4 -> 5 periods table)

A
  1. Period 1
    open = PV of MLP (fv=0)
    interest = 0
  2. Period 4
    end = 0
  3. Period 5
    all values = 0
27
Q

Example (Lessor amortization table)

A
  1. Period 1
    open = fair value
    pmt = compute pmt
    interest = 0
  2. Period 2
    open = end#1
  3. Period 5
    pmt = 0
    principal = 0
    end = guaranteed res/unguaranteed res/ bargain option
28
Q

Example (Lessor pmt, Lessee PV, rent, implicit > incremental, unguaranteed res, interest for the first year formula)

A
  1. Lessor
    1) pmt (n,implicit, -pv=sell price, fv=unguaranteed res, 1)
  2. Lessee
    1) PV (n, lesser imp and incr, -pmt of lessor, fv=0, 1)
  3. Interest 1st year = new rate * (Lessee PV or fair value - lessor pmt)

ACCT 343 (7 decks)

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