FAR 6 - LEASE

Question 1

Finance lease (lessee)
Sales type lease (lessor)

Answer 1

one of the criteria has to be met

Ownership transfer
Written purchase option
Net PV must be 90% + than the FV
Economic life/lease term must be 75%+ or more of the economic life of the asset
Specialized asset

If one of these is not met - considered operating lease

Question 2

if you sold the asset and leased it back

Answer 2

failed sale

Question 3

sale-leaseback

Answer 3

recognize loss immediately if FV is less than BV at the time of the sale-leaseback

Question 4

financing liability

Answer 4

Sale price > FV

208000 - 202000 = 6000 financing liab

Question 5

operating capital lease expense (amortization + interest)

Answer 5

amortized using SL

Question 6

amortization

Answer 6

total payments
———————— = SL: expense
total periods

Question 7

operating lease entries:

Answer 7

Return of use asset (ROU) —- xxx
Lease liability xxx

Lease expense (1 exp=amort+int) 18000 (constant)
Lease liability 16096 (based on PV)
Cash 18000
Accum amortization 16096

Question 8

operating capital lease entries:
pays 18000 = amort + interest
lease liab (reduction in ROU)   16096
interest                                         1904

Answer 8

Return of use asset (ROU) —- 48338 (CV of ROU asset)
Lease liability 48338

Lease expense (1 exp=amort+int) 18000 (constant)
Lease liability 16096 (based on PV)
Cash 18000
Accum amortization 16096
(aka reduction in ROU asset)

Question 9

financing capital lease entries (2 entries - separate for interest and amortization)

ROU assets - will include initial direct costs

*** lease expense is x implicit rate
lease liab 48338
Y2 lease liab 33117 (48338-33117 = 15221 prin)
Y3 lease liab 17021 (33117 - 17021 = 16096 prin)
lease payment 18000

   lease exp / int / amort Y3  18892  2779 + 16113 Y3  18017   1904 + 16113

Answer 9

ROU 48338
Lease liability 48338

Year 3:
Interest expense 1904
Lease liability 16096
Cash/Lease payable 18000

Amortization exp 16113
Accum Amortization 16113
(constant 16113*3=48338)

Question 10

Lessor: Sales type lease (all risks and rewards)

lessee has “OWNES”

Answer 10

Lease receivable - xx
Lease expense (direct cost) xx
Residual asset xxx
Loss
Fixed asset xxx
Gain xx

Question 11

Lessor: Direct Financing lease (most risks and rewards)

No OWNES
has PC P - present value
C- collectibility

Answer 11

Lease receivable xxx
Residual asset (incl dir cost) xxx
Fixed asset xxx

Gain will be deferred and amortized over the life of the lease

Initial direct cost will be deferred and amortized over the life of the lease

Question 12

Lessor: Operating lease (some risk and rewards)

No OWNES
No or one PC

Answer 12

RENTAL AGREEMENT ONLY

STILL keep asset and depreciate

Question 13

Amortization of LHI

Answer 13

over the estimated life of the lease or asset, w/c ever is shorter

if multiple LHI w diff life = add them up div by lease or asset life, shorter