FAR 35

Question 1

On what date does an operating lease take effect

Answer 1

It takes effect on the date the lessee assumes control over the leased property. This may not be the same date as when you make the first lease payment

Question 2

What are the rules when determining what number of year to depreciate an asset under a capital lease

Answer 2

• You must depreciate an asset over the shorter of the economic useful life or lease term

Question 3

Are property taxes included in a lease payment - considered as part of the MLP to be include din the initial lease liability

Answer 3

No - they are not

Question 4

what must you disclose about leases

Answer 4

• a description of leasing activities
• the gross amount of assets recorded under capital leases
• minimum lease payments for EACH of the next 5 years and in the AGGREGATE

Question 5

what is the difference between 
Lessor:
Operating
Non operating - sales types
Non operating - direct finaning

Answer 5

Operating - rent

Non-operating - sales type - seller is the manuafacturer and uses the lease as a way of selling the asset on an installment basis - make a profit

non-operating - direct finance lease - lessor is financing the acquisition, but is not earning any profit
the PV of minimum payment = fair value of the property

Question 6

How do you calculate depreciation when there is title transfer

Answer 6

If there is a title transfer at the end of the lease then you will use the USEFUL life

Question 7

How do you calculate depreciation when you have a capital lease - but its 75% or 90%

Answer 7

There is no transfer at the end so you depreciate it over the Shorter of the Useful or Legal Life which is the length of the lease

Question 8

In an operating lease - what must you disclose - Lessee

Answer 8

Lessee:

• MLP for each of 5 years ( does NOT include other expenses - just the lease) 100,000 per year for 5 years 500,000
• the same of the minimum lease payments due later than 5 years ( 400,000)
• the sum of the minimum lease payments due - the full aggregate amount -
  9 more years on the lease (500,000 plus 400,000 = 900,000

Question 9

Building and Land - what are the rules for operating vs. capital -

Answer 9

If Land only - if TT or BPO - the capital

If not TT or BPO - then Operating

If Building and Land - First check TT or BPO - If yes then capitalize separately

If no then check if land is > 25% of the lease - If yes then capitalize separately

Question 10

when you have a sale leaseback that is a capital lease - how is the gain reported

Answer 10

• The gain in NOT on income statement
• It is considered a deferred credit that is a liability in the liability section of the balance sheet

It is amortized over the course of the lease as a reduction of rent expense

Dr rent expense 75,000
cr cash 75,000

dr deferred gain
cr rent expense

Question 11

When you have a sales lease back and its a capital lease - how is the gain reported

Answer 11

the gain in not on the income statement

• It is a deferred gain that is a liability in the liabilities section of the B/S and is amortized over the course of the lease as a reduction in depreciation expense

dr depreciation expense 50
cr acc depec 50

dr deferred gain 5
cr depreciation expense 5

Question 12

For the lessor What type of lease is it when there is:

land and a building
BPO
manufacturer’s or dealers profit or loss

Answer 12

Operating Lease

Question 13

If you have land only with a TT - under what circumstances can a lessor account for it as a capital lease

Answer 13

Capital lease - IF you have met both 1) collectabilty of payments and 2) certainty of costs

If these two are met - then yes capital

If one of these is not met then operating lease

Question 14

What is a direct financing lease

Answer 14

• this is a lease where the lessors financing the acquisition of an asset by the lessee, but is not making any money -no profit

the MLP will equal the fair value of the property

The lessor will only earn interest income

dr lease payment receivables
cr Equipment
cr unearned interest revenue

Question 15

How do you calculate the sales price of a piece of equipment

Answer 15

It is equal to the PV of the MLP which is assumed to be the fair market value

However a list-selling price is NOT fair value - but is the asking price

In this instance use the carrying value to calculate the gain on the sale

Question 16

What are the lease types under IFRS

Answer 16

operating or finance lease

Its a finance lease if it transfers “substantially all “ of the rights and risks of ownership

Question 17

Under IFRS what are the rules for 75% of useful life and 90% of value

Answer 17

Not 75% of useful life but a “major portion” = finance lease

Not 90% of value, but”substantially all” of the fair value

If the asset is unique in that someone else can’t use it - then a finance lease

Question 18

What are accrued expenses

Answer 18

These are expenses that are recognized on the books before they are paid for

• Accrued wages
• Payroll liabilities such as the employer’s portion of tax and fringe benefits - such as FICA and Medicare

when accrued:

dr. wages expense 500
cr. wages payable 500

when paid:

dr. wages payable 500
cr. cash 500

Question 19

What is the difference between IFRS and GAAP on when a contingent liability is going to be recognized

Answer 19

In GAAP - when probable and the amount is in a range - use the lowest amount

In IFRS - you use the mid point amount

Question 20

What do you do to year end F/S when there is a loss ( storm) after years end but before the issuance of the F/S

Answer 20

You will disclose the loss, but not accrue any loss of the year end f/s

Question 21

How do you accrue for vacation days

Answer 21

• they are required to be accrued,

Sick days maybe if they vest or accumulate or both

When you report the liability include all the sick days in the balance - including years past that employees are entitles too

Question 22

What are the rules for a sales- lease back

Answer 22

This is when you sell an asset and then lease it back immediately

It can be an operating or capital lease

Operating - This is selected when the rental payments are less than 10% of the Fair Value. They are considered separate transaction

• When this happens you recognize all the gain on the sale immediately

Capital Lease - there are two options here. Both are Capital leases

1) The PV of the MLP is greater than 90% of the Fair Value of the asset
- When this happens you defer ALL of the gain and amortize it to depreciation expense:

Seller:
dr Cash 200
cr Equipment 120
cr deferred gain 80

dr deferred gain 20
cr depreciation expense 20

buyer:
dr leased Asset 200
cr obligation under capital lease 200

2)PV of MLP is between 10 and 90% - - This can be either an operating or a capital lease- in both cases you defer the gain up to the PV of the MLP - recognize rest immediately

If capital lease - offset to depreciation expense

If operating lease - offset to rent expense

Question 23

How do you depreciate if capital or operating leaseback and it is between 10-90%

Answer 23

If a capital leaseback ( meaning it also qualifies under TT, BPO, 75, or 90)

dr deferred gain 50
cr depreciation expense 50

the deferred gain reduced depreciation expense

If an operating lease the deferred gain is a reduction in rent expense

dr. deferred Gain 50
cr. rent expense 50

the result is that there is a reduction in the rent expense