Lease

Question 1

ROU Asset (Right of Use Asset)

Both Operating & Finance Lease

Answer 1

Lease Liability ( PV of Payments)
+Initial Direct Cost + Purchase Options
+Prepaid Lease Payment
- Lease Incentives
=ROU Asset

Question 2

Lease Term Requirement (Component)

Answer 2

Lease Term: Period of time the lessee is reasonably expected to lease the asset.
+Initial Lease Term
+Renewal Option Likely exercised by Lessee
+Option to terminate is unlikely to be exercised
+Renewal option is controlled by the lessor

Lease Term
**Greater than 12 months: Recognize asset and liability
**Less than 12 months: Treat as operating lease recognized lease expense each period.

Question 3

Lease Liability Structure

*Lease liability = PV of lease payment

Answer 3

1-Fixed/Variable lease payment
2-Purchase Option
3-Residual Value Guarantee
4-Nonrefundable Deposit

Combined #1#2#3#4 = Total lease payment to determine lease liability.

Question 4

Finance Lease Criteria
(only one Required)
!Otherwise it is treated as operating lease

Answer 4

(S) pecialized Property (no alternative use)
(P)urchase (reasonable certain to be exercised)
(O) ptions (reasonable certain to be exercised)
(T)ransgfer Title at end of lease lease
75 Remaining Economic Life > 75%
90 Present Value of lease payment is >90% of Fair Value

!(P)(O)(T)= Amortize base on life of asset, otherwise life of lease.

Variable lease payment:
>Include in lease liability if amount are known.
>Not included in lease liability & is expensed in the period incurred if variable payment is unknown.

Question 5

Lease miscellaneous component

Answer 5

Nonrefundable deposits: included in lease liability.

Upfront fees: Cost to execute lease included in R”OU Lease Asset”.

Purchase Options: Include in lease liability if reasonably certain exercised . Treated as lump sum paid at end of lease.

Lease payment: Fixed/variable include the following
-lease (rent)
-non-lease component (maintenance)
-non-component (taxes, insurance)

Question 6

Residual Value Guarantee Lease

Answer 6

> Guarantee residual value by lessee.
Lease liability included “probable amount” when lessee will own at end of lease.
If Guarantee value is greater than expected residual value. The difference is not included in lease payment.
If Guarantee value is less than expected residual value. No need to include in lease payment.

Question 7

Operating Lease Component

Answer 7

-Right-of use (ROU) asset and lease liability
-Prepaid Rent
-Refundable security deposit
-Leasehold improvements
-Lease (rent) expense

Initial Entry for Operating Lease:
Dr. ROU Asset XXX
Cr. Lease Liability XXX

Each Period for Operating Lease:
Dr. Lease Expense XXX (Total lease payment / lease term)
“Straight Line”
Dr. Lease Liability XXX (Accredited Interest (-)cash payment)
Cr. ROU Asset XXX (Accredited Interest(-)Lease expense)
Cr. Cash XXX(Lease Payment)

**Accredited Interest= Lease liability X Lease rate X Time
period

Question 8

Finance Lease Component

Answer 8

Reduction ROU asset=Amort Expense= Rou Asset /
Useful life or term
-Straight Line
-Interest Expense=lease liability X lease % X Time Period
-Reduce in lease liability=interest expense(-)lease payment

Finance Lease Inception entry:
Dr. ROU Asset XXX
Cr. Lease Liability XXX

Finance Lease each Period entry:
Dr. Interest Expense XXX (Lease liability X % X time period)
Dr. Lease Liability XXX(Interest Expense (-) Lease payment)
Cr. Cash XXX(lease payment)

Dr. Amortization ExpenseXXX(Rou Asset / Useful life or term)
“Straight-line”
Cr. Rou Asset XXX

Question 9

Lease Accounting Comparison

Answer 9

Operating Lease Finance Lease
Lease “Rou Asset”: PV of payment
Inception +initial direct cost Same
+Prepaid Payment
- Lease incentive received

Lease “LeaseLiability”: PV of payments Same
Inception

“Income Straight-line expense 2 expenses:
Statement “(Total lease Payments)/ 1-Amortization
Expense (Lease term)” expense (SL)
each period”: 1 Expense Only 2-Interest
expense
(lease liability X
interest rate)

“Reduction of Accreted interest Straight-line
ROU Asset (Lease liability X rate%) (ROU asset/
Each Period”: (-) Lease Expense useful life or
lease term)

“Reduction of Accreted % (-)lease InterestExpense
Lease Liability payment (-) Lease payment
Each Period”: