FAR Module 13E Flashcards
Who is the lessee?
Tenant or temporary borrower of property
Who is the lessor?
Landlord or owner of the property
How do you attack a lease problem?
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
What are some buzzwords to help determine the parties in a lease?
To
From
Payments
Receipts
Under what situations will the asset stay on the books of the lessor?
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!)
When you hear “charge” think…
debit
This lease type is basically a rental agreement
An operating lease
Under an operating lease, what JEs will the lessee and lessor make respectively?
Lessee:
Debit rent/lease expense
Credit cash
Lessor:
Debit cash
Credit rent revenue
For an operating lease, any prepayments should be recognized how by the lessee and lessor accordingly?
Lessee: as an asset, amortized using straight line
Lessor: as a liability, amortized using straight line
If free rental months is part of the package for an operating lease, what must the lessee do to account for it?
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
T/F
interest exists in an operating lease
FALSE
Interest only exists in a capital lease
What is the rule of thumb for determining if it is a bargain purchase ?
The purchase option is very low compared to the expected future value of the asset at that time
What are the two types of capital leases from the viewpoint of the lessor?
Sales type
Direct financing
When is a capital lease a sales-type lease?
When the cost does not equal the fair value
When is the capital lease a direct financing lease?
When the cost equals the fair value
What are the three criteria that must ALL be met for a lease to be considered a capital lease on the lessors books?
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
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)
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
What is the dollar amount to be capitalized for a lessee when it is a capital lease?
O - PV of payments and required buyout
W - PV of payments and bargain buyout
N - PV of payments
S - PV of payments
What time period does a lessee depreciate the capitalized lease asset over?
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)
When the lease is capitalized on the books of the lessee they should capitalize the asset on the balance sheet at what
Cost = PV of future lease payments (excluding the executory costs, insurance, or tax)
What are the required footnote disclosures for a lessee with a capital lease
Amount for appropriate required period (Five years)
Aggregate amount for the period thereafter
Amount in the aggregate
What are the columns for an amortization schedule?
Year Cash Interest expense Principle Balance
Annuity Due is for what circumstances?
Ordinary Annuity?
Annuity Due - pay at the beginning of the period
Ordinary Annuity - pay at the end of the period
If a question asks “what is the current liability at the end of the year” what must you do?
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
Under a sales-type lease the lessor experiences what two profits derived from that transaction?
1) gain or loss on sale (lease) of asset
2) interest income from collection of lease payment
To record the sale (lease) of an asset under a sales-type capital lease, what JE does the lessor make?
Debit lease receivable
Credit sale
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?
Debit COGS
Credit Asset
Under a direct financing capital lease the lessor recognizes what profit?
Only the interest income from collection of the lease payment. No gain or loss on the sale (lease) of the asset to the lessee
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?
Debit lease receivable
Credit asset
What is a leaseback?
Is it an operating or capital lease?
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
Under a leaseback who are the two parties?
The original owner becomes the seller and the lessee
The buyer becomes the lessor
What are the criteria for a sale to be a leaseback?
If PV/Selling Price 10% = Major
If Minor, no sale leaseback.
If Major, sale leaseback.
If the sale is a no sale leaseback (lease is minor) how do you recognize gains/losses? How do you record the lease payment?
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.
If the sale is a sale leaseback (lease is major) how do you recognize gains/losses?
Loss: recognize entire loss in year of sale
Gain: defer gain (up to PV of lease liab) & amortize the gain as an offset
How do you amortize the gain of a sale leaseback? How is this different between an operating and capital sale leaseback?
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
T/F
if FV > BV you cannot book a loss
TRUE
This is because this is an artificial loss. Defer the loss
Under IFRS you use what term instead of a “capital” lease?
Use “Financial” lease
What discount rate do you use when calculating the present value of future lease payments for the lessee in a capital lease
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.
T/F
under an operating lease you amortize the lease
FALSE
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
FALSE
improvements are always assets on the lessee’s books and are thus capitalized !
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
TRUE
T/F
IFRS is more principal based, so instead of “90%” and “75%” for OWNS requirements they say “major part” or “substantially all”
TRUE
The substance of this transaction is that it consists of two separate and distinct transactions
A sale-leaseback
Rental payments are recognized on a straight line basis even though the lease calls for payments that increase over the term of the lease
Operating lease - lessee
Depreciation expense related to the leased asset is reported on the lessee’s income statement over the lease term
Capital lease
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
Sales type lease
Initial direct costs should be treated as an asset and amortized over the life of the lease on the straight-line basis
Operating lease - lessor
The difference between the fair value of the asset leased and the total payments to be received over the lease term
Unearned interest revenue
Included in the lessor’s gross investment whether guaranteed or unguaranteed
Residual value
Interest revenue is the only item reported on the income statement over the lease term
Direct financing lease
Should be recorded as both an asset and a liability by the lessee when the lease contains a bargain purchase option
Present value of the minimum lease payments
Produces a constant periodic rate of return on the net investment
Interest method
The principal portion of the lease liability which must be paid within the next operating cycle
Current lease obligation
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
Implicit rate
Lessee’s right to purchase leased property for an amount substantially lower than the expected fair value at exercise date
Bargain purchase option
Costs, such as appraisal fees, incurred by the lessor in setting up a lease agreement
Initial direct costs
A lease agreement which requires the annual payments to be made at the beginning of each period
Annuity due
Leasehold improvements should be depreciated/amortized using what useful life?
The lesser of the estimated life and the lease life
