F4 - Deck 3

Question 1

How to calculate the carrying value (CV) of an operating lease? 4 Steps.

Answer 1

1. Carrying value of of Lease liability= Annual payment * PV rate of Implicit rate.
2. Interest = Implicit rate * annual payments
3. Amortization = Annual payments - Interest (OR Annual payment - 2.)
4. Carrying value= Previous Carrying value of Lease Liability - Amortization

Question 2

What does O.W.N.E.S. stand for? Relating to Finance leases.

Answer 2

O - Ownership: transfers at the end of the lease.

W - Written Option:
purchase option the lessee is reasonably certain to exercise.

N - Net Present Value (exceeds 90%): minimum lease payments = Fair value of asset (approximately 90% of FV of leased property).

E - Economic Life: Lease term = Major part (75%) of asset useful life.

S - Specialized Nature: Asset is specialized such that it has no alternative use to the lessor

*If one is met = Finance Lease

Question 3

Define: what is a lease?
Also Define: Lessor VS Lessee

Answer 3

Agreement, contains a contract. Between Lessor and a lessee.

Lessor: States the right to use.
Lessee: Accepts and pays for the right.

Question 4

Define: What is a Sublease?

Answer 4

When a lessee enters into a contract with another lessee for a specific property

Question 5

What 3 items make up an Operating Lease? 7OW

Answer 5

1. The lease term is equal to 70% of the economic life of the asset.
2. There is no written purchase option.
3. Ownership does not transfer at the end of the lease.

Question 6

When should a company recognized a Operation Lease Expense?
-Commencement date
-Alterations on property
-Move in date
-First payment date

Answer 6

Commencement date

Question 7

When does the Lessee calculate the Lease payment, purchase option, termination penalties, and the probable amount owed of the guaranteed residual?
- At the conclusion of the lease.
- On the commencement date of the lease.
- At no time during the lease term.

Answer 7

• On the commencement date of the lease.

Question 8

When would the exercise price of an option be included in lease payments?

Answer 8

When the lessee is reasonably certain to exercise the option to purchase the asset.

At the commencement date of the lease, lease payment will include the excise price of the asset.

Since the lessee is reasonably certain to exercise the bargain purchase option, the lease payment calculation includes the option price.

Question 9

How to recalculate a lease payment with “Free” pay periods? 4 Steps

Answer 9

1. Actual cost: Month * Monthly payments
2. Free Month amount: Free Months * Monthly payment
3. Total cost: 1. Minus 2.
4. Monthly lease: Divide 3. by total months

Question 10

How to amortize lease asset of a finance lease?

Answer 10

The economic life of the asset.

Question 11

How to calculate Right of Use (ROU)? With Leases.

Answer 11

The present value of minimum lease payments and bargain purchase option

Question 12

How to calculate:
Lease Payable?
Right of Use (ROU)?
Accumulated Amort?

Answer 12

Lease Payable:
Annual payment * PV @ Term #

Right of Use:
Annual Payments + Lease Payable

Accumulate Amort:
ROU / Term = Annual rate / 12 = Monthly rate