Leases Flashcards

1
Q

Short term lease journal entries

A

What lessee records
Dr. Lease Expense
Cr. Cash or Payable

What lessor records
Dr. Cash or receivable
Cr. Lease revenue

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2
Q

Operating Lease - Lessor

A

J/E if cash received at begging of year
Dr. Cash or receivable
Cr. Unearned lease revenue

J/E to recognize revenue at the end of the year
Dr. Unearned lease revenue
Cr. Lease revenue

Depreciation of asset
Dr. Depreciation Expense
Cr. Accumulated depreciation

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3
Q

Operating Lease - Lessee

A

Lessee capitalizes PV of minimum lease payments
Dr. Right-of-use asset
Cr. Lease liability

Journal Entry for payment at beginning of the year
Dr. Lease liability
Cr. Cash

To record lease expense at the end of year
Dr. Lease expense - payment amount
Cr. Right-of-use asset - amount after interest
Cr. Lease liability - interest expense

Then continue the cycle

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4
Q

Finance Lease criteria

A
  • title is transferred to lessee
  • lessee has the option to buy asset at the end of lease at a bargain
  • lease term is 75% or more of the useful life of the asset
  • PV of minimum lease payments is 90% or more of the FV of asset
  • asset has no alternate use
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5
Q

What rate does the lessor use

A

Always uses the implicit rate

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6
Q

Lessee interest rate

A

Lower of the incremental borrowing rate or lessor’s implicit rate

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7
Q

What amount does the lessee capitalize a leased asset

A

Lessee capitalizes at the lesser or PV of minimum lease payments or assets FV

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8
Q

Finance lease - lessee Journal entries

A

Journal entry at inception of lease
Dr. Right of use asset
Cr. Lease liability

Journal entry for payment at end of year
Dr. Interest expense
Dr. Lease liability
Cr. Cash

Amortization - length of the lease not useful life
Dr. Amortization expense
Cr. Right of use asset

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9
Q

Sales type lease for lessor journal entries using gross method

A

At inception of lease annuity due
Dr. Lease receivable - lease payments
Cr. Unearned interest - difference between FV & payments
Cr. Sales Revenue - FV of asset at inception

First lease payment
Dr. Cash
Cr. Accounts receivable

Entry to accrue for interest
Dr. Unearned interest
Cr. Interest revenue

Continue cycle

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10
Q

Direct Financing lease journal entries for lessor

A

At inception
Dr. Lease receivable
Cr. Deferred gross profit - difference between cost of asset & FV
Cr. Inventory/equipment

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11
Q

Direct Financing lease annual lease payment

A

FV of equipment minus present value of residual value. Then divide that by the present value of the annuity

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12
Q

Direct financing lease, lease revenue

A

CV time rate the amortizes to 0

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13
Q

Sales leaseback - lessee journal entries

A
Journal entry to record the sale
Dr. Cash
Dr. Accumulated depreciation
Cr. Equipment
Cr. Gain

Journal entry at inception of operating lease
Dr. Right of use asset - present value of lease payments
Cr. Lease liability

Journal entry over life of the lease
Dr. Lease expense - payment
Dr. Lease liability - payment minus interest
Cr. Right of use asset - payment minus interest
Cr. Cash - payment

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14
Q

What happens in a sales lease back

A

In a financing lease the lessee essentially takes ownership of the leased item. When the lease is over the lessee sells back the leased item to the lessor & the lessor leases the item back to the lessee

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15
Q

What makes failed sale in a lease back question

A

If the new lease is finance lease and the lessee takes ownership of the leased item again

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16
Q

Initial direct costs

A

Included in total of right of use asset and don’t use the PV factor

17
Q

Residual Value

A

Find PV of single sum and subtract from FV asset to calculate PV of lease payments - lessor