F4 M7

Question 1

what two things need to be present for a contract to be a lease?

Answer 1

1) depend on identifiable asset in which lessor does not have substantive substitution right
2) explain to lessee right of control of asset and obtain all of benefits from using asset and control use

Question 2

when contracts should be combined?

Answer 2

1) one or more contracts contain a lease
2) contracts entered into about the same time
3) parties of contract are the same
4) performance or price of one contract impacts other contracts
5) contracts have same commercial objectives
6) use of lease does not qualify as single component

Question 3

accounting for separate lease components?

Answer 3

1) identify each right to use an asset within contract
2) if contract contains a lease and non-lease components then:
Option 1: lease components are separate units of account from nonlease components
Option 2: each separate lease component combined with related nonlease components into one unit of account

Question 4

what if there is one right to use an asset?

Answer 4

one separate lease components

Question 5

what if there is more than one right to use an asset?

Answer 5

separate if:
1) right benefits lessee on stand-alone basis or together with other resources available to lessee
2) rights are neither highly dependent on each other nor highly interrelated

Question 6

consideration associated with a contract that must be allocated calc

Answer 6

all components of lease payments
+ other required payments in contract
-incentives owed/provided to lessee not accounted for in lease payments

Question 7

what if Option 1 is chosen?

Answer 7

consideration of contract allocated to separate lease and nonlease components based on relative stand-alone prices

Question 8

what if Option 2 is chosen?

Answer 8

consideration will be allocated to each combined unit of account based on relative stand-alone prices

Question 9

finance lease criteria (OWNES)

Answer 9

1) ownership
2) written option
3) net present value of all lease payments and any guaranteed residual value = asset’s fair value (90% or more)
4) economic life; term of lease represents major part of economic life of asset (75% or more)
5) specialized asset with no alternative use

Question 10

operating lease criteria

Answer 10

1) none of OWNES criteria for finance lease met
2) lease is less than 12 months

Question 11

when does the lease term begin?

Answer 11

on the commencement date of the lease

Question 12

when does the option to terminate or extend a lease exist?

Answer 12

1) either party has right to terminate
2) periods covered by an option to extend lease are included if lessee certain to exercise option
3) option to terminate included if lessee certain not to exercise option
4) periods covered by an option to either extend or not to terminate the lease included if exercise is controlled by lessor

Question 13

what items are included in lease payment calculation?

Answer 13

1) required contractual fixed payments
2) exercise option reasonably assured
3) purchase price at end of lease
4) only indexed or rate variable payments
5) residual guarantees likely to be owed
6) termination penalties reasonably assured

Question 14

what rate is used for a lease?

Answer 14

1) rate implicit in the lease OR if not determinable
2) incremental borrowing rate of lessee

Question 15

what are initial direct costs and how are they treated in relation to a lease?

Answer 15

-included in valuation of ROU asset
-costs incurred as a result of execution of lease
-any costs incurred prior to signing lease like lease term negotiations, document preparation, credit checks etc. not included in accounting for direct costs

Question 16

how are operating leases recorded on financials?

Answer 16

-ROU asset and liability recorded on B/S and amortized over life of lease using effective interest method
-lease expense recognized on I/S using SL method
-interest will be included as part of lease expense

Question 17

the purchase option and guaranteed residual are valued at?

Answer 17

PV of $1

Question 18

journal entries for ROU asset and liability

Answer 18

Dr. ROU asset
Cr. Lease liability

Question 19

subsequent journal entries for lease expense and amortization

Answer 19

Dr. Lease expense
Cr. Cash/lease liability

Dr. Lease liability
Cr. Accumulated amortization-ROU asset

Question 20

journal entry to record lease payment

Answer 20

Dr. Lease expense
Dr. Lease liability
Cr. Cash
Cr. Accumulated amortization-ROU asset

Question 21

how are leases recorded for financing leases on financials?

Answer 21

-ROU asset and liability recognized on B/S
-liability = PV of lease payments owed
-ROU asset includes initial direct costs (ex. commission paid, legal and consulting)
-incentives received by lessee from lessor will reduce value of asset
-journal entries are exactly the same as an operating lease liability
-ROU asset amortization will be expensed similar to recognizing amortization expense on other assets

Question 22

how is amortization expense calculated for a finance lease?

Answer 22

PV of all lease payments / number of years of lease term

Question 23

how is amortization expense calculated for an operating lease? AKA ROU asset reduction

Answer 23

lease expense - interest expense (calculated using effective interest method)

Question 24

how is the total lease expense calculated for a financing lease?

Answer 24

amortization expense + interest expense

Question 25

journal entry for lease payment under financing lease?

Answer 25

Dr. interest expense
Dr. lease liability
Cr. Cash

Question 26

journal entry for amortization under financing lease?

Answer 26

Dr. amortization expense
Cr. accumulated amortization-ROU asset

Question 27

accounting policy of ROUs election

Answer 27

lessees can choose not to recognize an ROU asset and lease liabilities for leases with terms of 12 months or less
-if election made, must be done by class of underlying asset and not include purchase options for asset lessee will certainly exercise

Question 28

B/S presentation of leases

Answer 28

-ROU assets and liabilities recognized as separate line items or with other assets and liabilities and disclosed separately in notes to F/S
-portion of lease liabilities due in one year or operating cycle, reported in current section and remaining in long-term
-finance and operating lease ROU assets/liabilities cannot be presented together
-ROU asset amortized and lease liability paid down over life of lease

Question 29

ROU asset amortization rules

Answer 29

ROU asset amortized beginning of commencement date using SL method
-amortize over asset’s useful life if ownership or written option criteria met
-amortize over shorter of lease term or useful life of asset if NPV, economic life, or specialized asset criteria met

Question 30

operating and finance leases on I/S

Answer 30

operating leases: lease expense included in income from continuing operations on lessee’s I/S

finance leases: I/S includes amortization of ROU asset and portion of lease expense related to interest on lease liability

Question 31

operating and finance leases on cash flow statement

Answer 31

operating leases: lease payments (including variable and short-term) under operating activities. Payments to bring asset to condition or prep is investing activities

financing leases: principal portion of lease payment is financing activity, interest portion is operating, and any variable or ST lease payments not included is operating

Question 32

qualitative lessee disclosures

Answer 32

1) nature of leases
2) determination of variable lease payments
3) residual value guarantees
4) info on significant obligations and rights of lessee
5) significant assessments and judgments
6) sale lease-back terms and conditions
7) accounting policy for ST leases and combining lease and non-lease components

Question 33

quantitative lease disclosures

Answer 33

1) finance lease costs
2) operating lease costs
3) ST lease costs
4) variable lease costs
5) cash payments for lease liabilities separated between operating and financing cash flows
6) supplemental noncash info on lease liabilities due to obtaining ROU assets
7) weighted average remaining lease term and discount rate
8) separate maturity analyses for operating and finance lease liabilities for five yrs