Lease

Question 1

Do lease payments include interest and principal? how do we get to the principal paydown?

Answer 1

PV of lease payments includes interest we have to back out what the interest amount is using the implicit rate to find what of that was the principal paydown

Question 2

How do you depreciate finance leases?

Answer 2

Basis of depreciation: By taking PV of lease payments at the implicit rate (+) cost at lease inception.

Than we take basis divided by lease term/useful life

Question 3

What is the value of lease at inception? how do you back out interest?

Answer 3

1) Annual payment (x) PV of payment
2) Take interest at inception (x) value of lease.
3) Take annual lease payment and subtract that interest expense

Question 4

What is the entry on an operating lease?

Answer 4

Debit ROU and credit Liability at inception. Only show one lease expense Interest + amortization included

Question 5

Define OWNES

Answer 5

O) ownership of asset is transferred at the end of the lease.
W) Written purchase option that is reasonable to be exercised. Which negatively impacts cash flow by the variable lease payments. If excepted to purchase deprecation should be over economic lfie
N) NRV or PV of all lease payments = 90% of FMV of asset.
E) Term lease represents 75% of economic life.
S) Asset is specialized so it will only serve on person

Only amortize the economic life of asset.

Question 6

How do free months effects the lease

Answer 6

FMV of lease goes down, divide the total months by the original amount.

Question 7

What is the lease expense of that year?

Answer 7

Monthly lease expense (x) months in current year lease.

Question 8

What is the interest expense of lease?

Answer 8

PV of lease (x) implicit interest rate

Question 9

What is the lease shown in the bal sheet at inception with expected residual value.

Answer 9

1 Required payment (x) factor of annuity due = lease of asset 2 If there is expected residual than do the following: Expected residual (x) PV of dollar (x) rate.

Question 10

Lease both operating vs financing

Answer 10

Both capitalized and if short term 12 months or less we don’t capitalized

Question 11

Operating lease entry

Answer 11

ROU and lease liability, amortized over life of the lease using the effective interest method

Question 12

Operating lease presentation

Answer 12

PV of lease payments using discount

Question 13

Residual value on lease

Answer 13

Residual value of lease that is owed at the end of the term “ included as part of minimum lease payments at PV of 1.00”