Leases

Question 1

Short Term Lease Journal Entries

Answer 1

Lessee
Lease Expense
—–Cash or Payable

Lessor
Cash or Receivable
———-Lease Revenue

Question 2

How Lessee initially recognizes a lease liability

Answer 2

Multiply annual rent due each period and multiply by annuity factor

Right-of-Use-Asset
———-Lease Liability

Question 3

How Lessee records initial payment

Answer 3

Multiply annual rent due each period and multiply by annuity factor and divide by number of years. If first payment is made at inception just subtract initial payment then divide

Lease Liability
———-Cash

Question 4

How Lessee records interest

Answer 4

• Multiply implicit rate by lease liability
• Subtract that from Lease payment
• Difference reduces Lease liability for next period

Lease Expense: Annual calculated payment

• ———Right of use asset: Payment minus interest
• ———Lease Liability: Interest

Question 5

How Lessor records payments

Answer 5

If payment is made at beginning
Cash
—-Unearned Lease Revenue

when earned
Unearned Lease Revenue
—–Lease Revenue

Question 6

Operating Lease Lessor Depreciation

Answer 6

Use useful life, not the lease term

Depreciation Expense
—–Accumulated Depreciation

Question 7

5 Criteria for a Finance Lease

Answer 7

• The lease agreement transfers ownership of the leased asset to the lessee at the end
• Bargain purchase option (BPO).
• Lease is 75% or more of useful life of leases asset
• Minimum lease payments are 90% of the FV
• No alternate use

Question 8

Executory Costs

Answer 8

Not capitalized by any party

Question 9

What value does the Lessee capitalize a finance lease

Answer 9

Lesser of FV or PV of minimum lease payments

Question 10

Which rate should you use for lease liability

Answer 10

Lesser of incremental borrowing rate or implicit rate

Question 11

What method should lessor use to record interest revenue

Answer 11

Effective interest Method

Question 12

Direct Finance Note

Answer 12

• Use rate that amortizes NET lease receivable to 0 for carrying value
• Use implicit rate for FV

Deduct the 2 for amortization

Question 13

Lease Revenue for Direct Finance Lease

Answer 13

Carrying value multiplied by the rate that amortizes NET lease receivable to 0

Question 14

What do you do with residual value

Answer 14

deduct from FV but use factor %

Question 15

Sales Leaseback

Answer 15

If lessor sells to a lessee then leases it back and the lease is a finance lease or ownership transfer back, then it is a failed lease

Question 16

Bargain Purchase Option

Answer 16

Multiply bargain purchase option PV factor of a single sum and add to PV of lease payments and that’s the amount capitalized

Question 17

Initial Direct Costs Lessee

Answer 17

Multiply Direct Cost by PV factor of a single sum and add to PV of lease payments and that’s amount capitalized

Question 18

Lessor Direct Financing Lease Rate

Answer 18

Lessor must use the rate that amortizes net lease receivable down to 0

Question 19

Lessee Disclosure about lease

Answer 19

Lessees are required to disclose the amount that they expect to pay over the next five years for their finance and operating leases both in aggregate and for each year

Question 20

Question where you have the FV and BV of leased item and present value factors

Answer 20

Use the FV of leased item to divide by

Question 21

Uneven lease terms

Answer 21

• Multiply amount to be paid by when payments start to end of lease
• Divide by actual lease term
• Multiply that by number of months from when lease should start to end of year

Question 22

Requirements for Sales Leaseback

Answer 22

• a contract exists
• seller satisfies performance obligation
• leaseback must be operating because if its a finance lease then it’s a failed sale