Leases Flashcards
Short term lease journal entries
What lessee records
Dr. Lease Expense
Cr. Cash or Payable
What lessor records
Dr. Cash or receivable
Cr. Lease revenue
Operating Lease - Lessor
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
Operating Lease - Lessee
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
Finance Lease criteria
- 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
What rate does the lessor use
Always uses the implicit rate
Lessee interest rate
Lower of the incremental borrowing rate or lessor’s implicit rate
What amount does the lessee capitalize a leased asset
Lessee capitalizes at the lesser or PV of minimum lease payments or assets FV
Finance lease - lessee Journal entries
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
Sales type lease for lessor journal entries using gross method
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
Direct Financing lease journal entries for lessor
At inception
Dr. Lease receivable
Cr. Deferred gross profit - difference between cost of asset & FV
Cr. Inventory/equipment
Direct Financing lease annual lease payment
FV of equipment minus present value of residual value. Then divide that by the present value of the annuity
Direct financing lease, lease revenue
CV time rate the amortizes to 0
Sales leaseback - lessee journal entries
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
What happens in a sales lease back
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
What makes failed sale in a lease back question
If the new lease is finance lease and the lessee takes ownership of the leased item again