FAR 5 - Accounting for Leases - Operating Lease Flashcards
What are the two types of leases in U.S. GAAP and IFRS?
1) Operating Lease
2) Capital Lease (Finance Lease in IFRS)
Who is the lessor and who is lessee in operating lease?
Lessor is person collecting rent.
Lessee is person paying rent.
What are examples of operating lease and capital lease?
You lease a car and will give it back after payments are done = operating lease
You lease a car and will be able to keep it after payments are done = capital lease
How does lessee record rent expense in operating lease?
Dr: Rent Expense
Cr: Cash/rent payable
How does lessee record lease bonus in operating lease?
Lease bonus is like commission paid to real estate agent. It is an ASSET (deferred charge) and AMORTIZED using the straight-line method over life of the lease.
How long do you capitalize leasehold improvements in operating lease?
Leasehold improvements should be depreciated (amortized) over the lesser of:
a) lease life
b) asset/improvement life
What is rent kicker in operating lease? Example of rent kicker: Landlord says if you have this much of volume, you owe more money.
Rent Kicker = Period Expense
How do you record refundable security deposit under lessee accounting for operating lease?
Security deposits are simply reported as an asset until refunded by the lessor.
How do record free or reduced rent consideration for lessee accounting for operating lease?
Lessee must take total rent expense to be paid for the entire lease term and divide it evenly over each period
Example: 5 years (60 months) at $1,000, first six months are free
1)
Gross - $60,000
Less Discount - $6,000
Net cost for 5 years - $54,000
2)
$54,000 / 60 months = monthly rent expense
For first six months
Dr: Rent expense
Cr: Rent payable
For months 7-60
Dr: Rent expense
Dr: Rent payable
Cr: Cash
How long does lessor record depreciation for asset in operating lease?
Lessor records depreciation over the asset’s useful life.
How does lessor record rent expense in operating lease?
Dr: Cash/rent receivable
Cr: Rental income
What are two types of security deposits for lessor in operating lease?
1) Nonrefundable security deposit
2) Refundable security deposit
How do you record nonrefundable security deposit?
Deferred by the lessor (unearned revenue) and capitalized by the lessee (prepaid rent expense)
How do you record refundable security deposit?
Treat as receivable by the lessee and a liability by the lessor until the deposit is refunded to the lessee
Dr: Cash
Cr: Refundable deposit
What are temporary differences for lessor in operating lease?
1) GAAP - Rental income is reported when EARNED
2) Tax - Rental income is reported when RECEIVED
