F6/M2 Capital Leases

Question 1

GAAP -> Capital Lease

IFRS -> Finance Lease

Answer 1

same shit

Question 2

Lessee, no rent expense

Answer 2

Record asset, liability, depreciation, and interest expense

Question 3

(LESSEE) 4 Criteria for Capital Lease

Meet just 1 of OWNS) (GAAP

Answer 3

1. Ownership transfers at end of lease
2. Written option for bargain purchase
3. Ninety % rule: PV of rent payments > 90%
   of FV of leased property
4. Seventy-five % rule: Lease term > 75% of
   economic life

JUST ONE

Question 4

IFRS Capital Lease Criteria

Answer 4

Substantially all the risks and rewards inherent in ownership are transferred to the lessee

Question 5

(GAAP) Sales-type / Direct-financing lease

Answer 5

Sales-type: Include profit or loss to lessor
- FV > CV
- Record Profit/ Loss and Interest Income on
note

Direct: No profit/loss

• FV = CV
• Just record Interest Income

Question 6

(LESSOR) Criteria for Capital lease (LUC)

GAAP

Answer 6

1. Lessee “OWNS” property
2. Uncertainties don’t exist about costs
3. Collectibility is reasonably predictable

Question 7

Under GAAP, it is possible that a Lessee records a lease as a Capital Lease and the Lessor records it as an Operating Lease

Answer 7

True

Question 8

IFRS: Lessee copies the Lessor

Answer 8

True

Question 9

Lessee Capital Lease Accounting

Answer 9

Each payment is allocated to interest expense and a reduction of principal

Question 10

JE Lessee Capital lease at inception

Answer 10

Dr: Fixed Asset
Cr: Liability - Obligation under Capital
lease

Question 11

*** Lessee Capitalizes the asset and liability at the LESSER of:

Answer 11

PV of min lease payments
  1. PV of Lease Payments
   2. PV of Residual 
    3. PV Bargain purchase option
- or- 
FV at acquisition date

Question 12

*** Items to exclude from Capitalization of PV of minimum lease payments

Answer 12

Executory Costs
– Insurance
– Maintenance
Executory costs are a period expense

Optional Buyout

Question 13

When calculating the PV of minimum lease payments, use the LESSER of:

Answer 13

Implicit rate

Incremental borrowing rate

Question 14

*** Depreciable Life

Lessee keeps asset (O or W)
- Asset Life

Lessee gives asset back (N or S)
- Term of the lease

Answer 14

Meet “O” -or- “W”
- Asset Life

Meet “N” -or- “S”
- Lease Life

Question 15

*** Recording the Gross Investment for a Lessor under a Sales-type Capital Lease

Answer 15

Gross investment = Lease pmt’s (+)
Ungauranteed residual

Net Investment = Gross Investment (x) PV
factor

Gross Investment (-) Net Investment =
Unearned Interest Revenue
- Contra asset, as interest is earned, contra
asset is reduced

Question 16

Have to record COGS under Sales-type lease

Answer 16

COGS = Cost of Asset (-) PV of non-

guaranteed residual value

Question 17

Sales revenue under Sales-type lease =

Answer 17

PV of minimum lease payments

• PV of lease payments
• PV of guaranteed residual
• PV of BPO

Question 18

Direct Financing lease

Answer 18

Don’t record COGS or Sales Revenue