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FAR Personal Flashcards > FAR Module 13E > Flashcards

FAR Module 13E Flashcards

0
Q

Who is the lessee?

A

Tenant or temporary borrower of property

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1
Q

Who is the lessor?

A

Landlord or owner of the property

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2
Q

How do you attack a lease problem?

A

1) identify parties (lessee/lessor)
2) note the date the lease begins (if capital lease, need PV Annuity Due)
3) type of lease (operating/capital)
4) time period of lease

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3
Q

What are some buzzwords to help determine the parties in a lease?

A

To
From
Payments
Receipts

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5
Q

Under what situations will the asset stay on the books of the lessor?

A

An operating lease OR when the lease is considered a capital lease for the lessee but not the lessor (under which case the asset will be on the books of both the lessor and the lessee!)

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6
Q

When you hear “charge” think…

A

debit

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7
Q

This lease type is basically a rental agreement

A

An operating lease

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8
Q

Under an operating lease, what JEs will the lessee and lessor make respectively?

A

Lessee:
Debit rent/lease expense
Credit cash

Lessor:
Debit cash
Credit rent revenue

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9
Q

For an operating lease, any prepayments should be recognized how by the lessee and lessor accordingly?

A

Lessee: as an asset, amortized using straight line
Lessor: as a liability, amortized using straight line

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10
Q

If free rental months is part of the package for an operating lease, what must the lessee do to account for it?

A

Take the total rent expense for the entire lease term and divide it evenly over each period. This follows the matching principle. Rent is considered on the straight line basis so even if payments change, technically rent does not

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11
Q

T/F

interest exists in an operating lease

A

FALSE

Interest only exists in a capital lease

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13
Q

What is the rule of thumb for determining if it is a bargain purchase ?

A

The purchase option is very low compared to the expected future value of the asset at that time

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14
Q

What are the two types of capital leases from the viewpoint of the lessor?

A

Sales type

Direct financing

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15
Q

When is a capital lease a sales-type lease?

A

When the cost does not equal the fair value

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16
Q

When is the capital lease a direct financing lease?

A

When the cost equals the fair value

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17
Q

What are the three criteria that must ALL be met for a lease to be considered a capital lease on the lessors books?

A

L - lessee “OWNS” the leased property
U - uncertainties do not exist regarding any unreimburseable costs to be incurred by the lessor
C - collectibility of the lease payments is reasonably predictable

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18
Q

What are the four conditions that exist for a lessee to determine if the lease is capital (one must be true for a capital lease to exist)

A

O - ownership transfers at end of lease
W - written option for bargain purchase
N - 90% of leased property: PV of future lease payments/FMV of asset now
S - 75% of useful life: lease term / life

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19
Q

What is the dollar amount to be capitalized for a lessee when it is a capital lease?

A

O - PV of payments and required buyout
W - PV of payments and bargain buyout
N - PV of payments
S - PV of payments

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20
Q

What time period does a lessee depreciate the capitalized lease asset over?

A

O - depreciate over asset life (legal form)
W - depreciate over asset life (legal form)
N - depreciate over lease life (substance)
S - depreciate over lease life (substance)

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23
Q

When the lease is capitalized on the books of the lessee they should capitalize the asset on the balance sheet at what

A

Cost = PV of future lease payments (excluding the executory costs, insurance, or tax)

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24
Q

What are the required footnote disclosures for a lessee with a capital lease

A

Amount for appropriate required period (Five years)
Aggregate amount for the period thereafter
Amount in the aggregate

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25
Q

What are the columns for an amortization schedule?

A 
Year 
Cash 
Interest expense 
Principle 
Balance
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26
Q

Annuity Due is for what circumstances?

Ordinary Annuity?

A

Annuity Due - pay at the beginning of the period

Ordinary Annuity - pay at the end of the period

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27
Q

If a question asks “what is the current liability at the end of the year” what must you do?

A

Make amortization table that goes through the year after they are asking. The current liability is only the principle portion paid off of the following year

28
Q

Under a sales-type lease the lessor experiences what two profits derived from that transaction?

A

1) gain or loss on sale (lease) of asset

2) interest income from collection of lease payment

29
Q

To record the sale (lease) of an asset under a sales-type capital lease, what JE does the lessor make?

A

Debit lease receivable

Credit sale

30
Q

To remove the sold asset from inventory and record the expense of the sale on the income statement under a sales-type capital lease, what JE does the lessor make?

A

Debit COGS

Credit Asset

31
Q

Under a direct financing capital lease the lessor recognizes what profit?

A

Only the interest income from collection of the lease payment. No gain or loss on the sale (lease) of the asset to the lessee

32
Q

Since there is no gain/loss on the sale of an asset under a direct financing capital lease, what is the JE for the lessor?

A

Debit lease receivable

Credit asset

33
Q

What is a leaseback?

Is it an operating or capital lease?

A

Property is sold by the owner and immediately leased back again, with the original owner/seller never giving up possession or use of the property.

This can be either an operating or capital lease

34
Q

Under a leaseback who are the two parties?

A

The original owner becomes the seller and the lessee

The buyer becomes the lessor

35
Q

What are the criteria for a sale to be a leaseback?

A

If PV/Selling Price 10% = Major

If Minor, no sale leaseback.
If Major, sale leaseback.

36
Q

If the sale is a no sale leaseback (lease is minor) how do you recognize gains/losses? How do you record the lease payment?

A

Gains: recognize entire gain in year of sale. Record rent expense for each payment

Loss: recognize entire loss in year of sale. Record rent expense for each payment.

37
Q

If the sale is a sale leaseback (lease is major) how do you recognize gains/losses?

A

Loss: recognize entire loss in year of sale
Gain: defer gain (up to PV of lease liab) & amortize the gain as an offset

38
Q

How do you amortize the gain of a sale leaseback? How is this different between an operating and capital sale leaseback?

A

If it is an operating sale leaseback: amortize the deferred gain on sale as an offset to the rent expense to be paid in the future

If it is a capital sale leaseback: amortize the deferred gain on the sale as an offset to depreciation expense on the capitalized asset that original owner/seller “owns” again

39
Q

T/F

if FV > BV you cannot book a loss

A

TRUE

This is because this is an artificial loss. Defer the loss

40
Q

Under IFRS you use what term instead of a “capital” lease?

A

Use “Financial” lease

41
Q

What discount rate do you use when calculating the present value of future lease payments for the lessee in a capital lease

A

The discount rate is the lower of the:
Implicit rate in the lease (if known)
Market rate

The lower rate gives you a higher calculation! Don’t be fooled by this.

44
Q

T/F

under an operating lease you amortize the lease

A

FALSE

45
Q

T/F

improvements to the asset are not considered an asset to the lessee in an operating lease because they will be returning the asset anyway

A

FALSE

improvements are always assets on the lessee’s books and are thus capitalized !

46
Q

T/F

Never set up an asset for greater than its fair market value at that time. If present value is greater than fair market value use Fair-market value

A

TRUE

47
Q

T/F

IFRS is more principal based, so instead of “90%” and “75%” for OWNS requirements they say “major part” or “substantially all”

A

TRUE

48
Q

The substance of this transaction is that it consists of two separate and distinct transactions

A

A sale-leaseback

49
Q

Rental payments are recognized on a straight line basis even though the lease calls for payments that increase over the term of the lease

A

Operating lease - lessee

50
Q

Depreciation expense related to the leased asset is reported on the lessee’s income statement over the lease term

A

Capital lease

51
Q

Sales revenue (the present value of the minimum lease payments) less the carrying amount of the leased asset is reported on the lessor’s income statement at the inception of the lease

A

Sales type lease

52
Q

Initial direct costs should be treated as an asset and amortized over the life of the lease on the straight-line basis

A

Operating lease - lessor

53
Q

The difference between the fair value of the asset leased and the total payments to be received over the lease term

A

Unearned interest revenue

54
Q

Included in the lessor’s gross investment whether guaranteed or unguaranteed

A

Residual value

55
Q

Interest revenue is the only item reported on the income statement over the lease term

A

Direct financing lease

56
Q

Should be recorded as both an asset and a liability by the lessee when the lease contains a bargain purchase option

A

Present value of the minimum lease payments

57
Q

Produces a constant periodic rate of return on the net investment

A

Interest method

58
Q

The principal portion of the lease liability which must be paid within the next operating cycle

A

Current lease obligation

59
Q

Produces a desired rate of return which causes the aggregate present value of the minimum lease payments to be equal to the fair value of the leased property

A

Implicit rate

60
Q

Lessee’s right to purchase leased property for an amount substantially lower than the expected fair value at exercise date

A

Bargain purchase option

61
Q

Costs, such as appraisal fees, incurred by the lessor in setting up a lease agreement

A

Initial direct costs

62
Q

A lease agreement which requires the annual payments to be made at the beginning of each period

A

Annuity due

63
Q

Leasehold improvements should be depreciated/amortized using what useful life?

A

The lesser of the estimated life and the lease life

FAR Personal Flashcards (34 decks)

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