F5: Capital/Finance Leases

Question 1

Lessee Capital Lease Criteria (GAAP)

Answer 1

Just has to meet one:
O- ownership transfers at end of lease
W- written option for bargain purchase
N- 90% of FV of asset is < PV of lease payments
S- 75% or more of asset life is committed

Question 2

Lessee Finance Criteria (IFRS)

Answer 2

O- ownership transfers
W- written bargain purchase options
E- most of economic life
S- PV of minimum lease payments amounts to substantially all of the FV
F- gains/losses from fluctuation in FV accrue to lessee
A- ability to continue the lease at a lower cost than market
C- can cancel lease
S- specialized nature- can’t be used by another

Question 3

Lessor: Sales-Type/Direct Financing Type Criteria

Answer 3

“Owner has to have all the LUC” (so all 3)
L- lessee owns the leased property
U- uncertainties do not exist
C- collectability of lease payment predictable

Question 4

Sales-Type Lease has how many profits?

Answer 4

2

• Gain on sale
• Interest Income

Question 5

Direct Financing Lease has how many profits?

Answer 5

1

-Interest income

Question 6

Lessee Capital (Finance) Lease: How to record the lease

Answer 6

Records the lease as an asset & liability at the LESSER of:

• FV of asset @ inception of lease
• Cost (PV of minimum lease payments)

Question 7

Items to include in lease cost:

Answer 7

• Any obligated payments
• Bargain purchase option
• Guaranteed residual value

Question 8

Items to exclude in lease cost:

Answer 8

• Executory costs (insurance, maint, taxes)

- Optional buyout (not required and not a bargain)

Question 9

When calculating PV of minimum lease payments, remember these things:

Answer 9

If Periodic Payment = use PV of annuity due or ordinary

If Bargain Purchase Option OR Guaranteed Residual = use PV of $1

Question 10

Lessee: Interest Rate to Use;

Answer 10

LOWER of:

• Lease rate (if known)
• Lessee’s borrowing rate

Question 11

Basic depreciation calculation

Answer 11

Capitalized lease assets less salvage value = depreciation basis

Then divide by periods of benefit = depreciation expense per period

Question 12

Period of Benefit (GAAP)

Answer 12

O &W = use asset life

N & S = use lease life

Question 13

Period of Benefit (IFRS)

Answer 13

Use SHORTER of lease term and assset life

Question 14

Lessee’s disclosures of leases

Answer 14

Disclose everything- the more the better

Question 15

Lessor Accounting: Recording a sales-type (finance) lease

Answer 15

Know calculations for:

• Gross investment
• Net investment
• Unearned interest revenue
• COGS
• Sales Revenue

Question 16

Lessor Accounting: Recording a direct financing (finance) lease

Answer 16

Know calculations for:
-Gross investment (same as sales-type)
-Net investment (same as sales-type)
-Unearned interest revenue (same as sales-type)
(no sales revenue or COGS)

Question 17

Gross Investment Calculation

Answer 17

Lease Payment
+ Unguaranteed residual value
= Gross Investment

Question 18

Net Investment Calculation

Answer 18

Gross investment
X PV
= Net Investment

Question 19

Unearned Interest Revenue Calculation

Answer 19

Gross investment
- Net investment
= Unearned interest revenue (future interest)

Question 20

COGS Calculation

Answer 20

Cost of asset
- PV of unguaranteed residual value
= COGS

Question 21

Sales Revenue Calculation

Answer 21

Cost
+ Profit
= PV AKA SP AKA FV