F6 Flashcards
What are leasehold improvements?
Categorized under operating leases, these are things permanently attached to the land, NOT EASILY REMOVED. Capitalize the value and added to PPE section. Also depreciate the asset over the lower of the lease term or asset useful life
What is a lease bonus? (both p)
Lessee:
prepaid asset - where you prepay a portion of the lease and amortize the amount over the term of the lease
Basically, lessee pays a portion of the lease early so that the lessor gets more money up front.
Lessor:
Since lessee prepaid, its liability - unearned revenue for the lessor and still amortized over lease term.
What is a rent kicker? both p
Lessee:
EXPENSE - A premium paid on top of the original lease,
Lessor:
Revenue -
What is a REFUNDABLE security deposit? both p
Lessee:
ASSET (RECEIVABLE) - Lessee paid and is recognized as a receivable until the lessor actually pays it back
Lessor:
Liability - money that still needs to be paid back to lessee
What is a NON-REFUNDABLE security deposit? both p
Lessee:
ASSET (PRE-PAID) - Remains prepaid until the lessor determines its been earned
Lessor:
Liability (Unearned Revenue) - Not recognized until the deposit is earned by the lessee
How to deal with problems with free/reduced rent offered at beginning of term?
Removing the amount of free rent, still need to recognize total monthly rent and accrue that amount. For the free period recognize the expense for the discounted amount, and then back to normal after that period expires.
Rule for capitalizing leases?
AS LONG AS MEET 1 of 4 CRITERIA
1) Ownership transfers at end of lease
2) Written option for bargain purchase, means lessee can purchase leased property at end of term for less than FMV
3) Lease term greater than or equal to 75% of the total economic life
4) PV of lease payments is greater than or equal to 90% of FV of property
Lease Capitalization Rules (LESSEE Perspective)
1) Use 4 criteria to determine if lease qualifies as capital lease
2) Find the PV of the minimum lease payments (plus any BPO or guaranteed residual value) and compare to FV of asset, record the lower of the 2 as the initial lease value
Lease XX
Obligation XX
3) Record first payment in full (annuity due)
Obligation XX
Cash XX
4) Record interest expense
Interest Expense XX
Interest Payable XX
5) Record Depreciation
Depreciation Expense XX
Accumulated Depreciation XX
6) Interest Payable XX
Obligation XX
Cash XX
Requirements for capital lease (lessor perspective)
1) Needs to be capital lease under lessee perspective
2) No cost uncertainties
3) Collectability is reasonably predictable
**If all 3 requirements met, pretend its sale on credit and stop recording depreciation
Record sales-type lease (lessor perspective)
2 JOURNAL ENTRIES
1) Record overall lease value and unearned interest income
Lease payments receivable XX
Unearned Interest Income XX
Sales Revenue XX
2) Record equipment cost
COGS XX
Inventory XX
Record direct financing lease (lessor perspective)
Only record first journal entry, but decreasing asset instead of sales revenue, nothing actually bought/sold/exchanged because treating it just like a loan!!
What is a direct financing lease?
Where selling price of equipment is equal to the cost
Lessee Capitalization
Record leased asset at lesser of FV of asset or PV of minimum lease payments (includes any BPO or guaranteed residual value) —– EXCLUDE executory costs
Discount rate - use lower of implicit rate or borrowing rate
What is the FV of a lease equal to?
The PV of the future cash flows!!!
what does it mean when it says “capital lease obligation NET OF CURRENT PORTION?”
NET means add that part to the original capital lease obligation
What are executory costs and how are they treated?
INCLUDE: insurance, taxes, and repairs and maintenance —–> these costs should be SUBTRACTED from when calculating the lease obligation value (AKA. the PV of minimum lease payments)
Executory costs - these are expensed when paid
Lease DEPRECIATION RULES
When there is BPO or title transfer option, lease is depreciated over ASSET LIFE. When there is no transferring of ownership options, use LEASE TERM!!!
Lease capitalization UNDER IFRS!
Add costs when calculating the PV of the asset/obligation
Relationship between PV total payments, total interest income and original lease liability`
Total CF from lease payments - Total CF from PV pmts = TOTAL INTEREST INCOME
Sales-Leaseback RULES
1) If PV min lease payments < 10%, recognize all gain immediately (SP - CV), losses, artificial losses and defer nothing
2) If PV min lease payments >90%, defer all gain, recognize losses immediately, and defer artificial losses
3) If PV min lease payments >10% but <90%, defer gain up to PV min lease payments then recognize rest, losses recognized immediately and artificial losses deferred
IFRS Sales leaseback rules
1) If lessee OWNS it - defer all gain
2) if lessee doesn’t OWNS it - recognize gain
- if SP = FV, recognize NOW
- If SP > FV, defer all gain
- If SP < FV, recognize loss NOW
TO REMEMBER FOR WHEN WRITING JE FOR OPERATING LEASES!!!!!
RECORDING: NO depreciation NO interest NO asset NO liability
Just rent expense
amortization deferred gain - salesback leases
Capital lease = over asset life
operating lease = over lease term
Journal entries lease back - operating lease
1) Record the lease
Cash XX
Asset XX
Unearned (deferred) gain XX
Earned gain XX
2) Record rent payment
Rent Expense XX
Cash XX
3) Amortization of lease
Unearned gain XX
Earned Gain XX
