FAR 12 - LEASES

Question 1

What are the components of the lease receivable for a lessor involved in a direct-financing lease?

Answer 1

minimum lease payments + residual value

**initial direct costs are deferred

**executory costs are expenses as incurred with all leases

Question 2

If a lease contains a purchase option, over what life does the lease get amortized? (lease life or useful life?)

Answer 2

when a lease contains a purchase option, the lease will be amortized over its useful life

Question 3

If a lease contains a purchase option, what is the capitalized amount to be depreciated?

Answer 3

acquisition costs (which includes any purchase option) minus salvage value

Question 4

if a lease does not contain a purchase option or title transfer, over what life does the lease get amortized? (lease life or useful life)

Answer 4

if a lease does not contain a purchase option or title transfer, the lease will be amortized over its lease life (useful life ONLY if the useful life is shorter than the lease life)

** amortization in this case is calculated without regard to any residual value

Question 5

is a bonus to obtain a lease expense as incurred or amortized over the life of the lease?

Answer 5

amortized over the life of the lease

Question 6

in a sales-type lease, is the amount that gets amortized equal to present value of the lease payments?

Answer 6

yes

Question 7

When do you use the incremental borrowing rate vs implicit rate?

Answer 7

you use the implicit rate only when it is known.

For the lessee: if the implicit rate is not known, you use the incremental borrowing rate

For the lessor: the implicit rate is always known to the lessor, so you use the implicit rate

Question 8

what amount should be reported as the lease obligation if the present value of the minimum lease payments at inception exceeds the fair value of the leased asset?

Answer 8

if the present value of the lease obligation exceeds the fair value of the leased asset, the lease obligation should be reported at the fair value

Question 9

Are taxes and insurance included in the ROU at inception?

Answer 9

Yes, UNLESS it is specifically shown that the taxes and insurance are billed separately by the lessor as incurred

Question 10

over what life does a sales-type lease get amortized?

Answer 10

a sales-type lease is treated by the lessee as a finance lease.

it gets amortized over the lease life (or useful life ONLY is the useful life is shorter)

Question 11

in a sale-leaseback transaction where one of the five criteria for a finance lease is met, how is the sale treated?

Answer 11

the sale is treated like a loan to raise cash

Question 12

in a sale-leaseback transaction where one of the five criteria for a finance lease is NOT met, how is the sale treated?

Answer 12

the sale is treated like a sale + operating lease

Question 13

in a sales-lease back transaction, when are profits or losses recognized in income?

Answer 13

in a sees-leaseback transaction, profits or losses are recognized immediately

Question 14

When a lease is more than 75% of the assets useful life, it will be accounted for as what type of lease?

Answer 14

sales-type lease, and you would depreciate it over the shorter of the lease term or useful life

**unless there is a title transfer option, then it will be depreciated over the useful life