Leases

Question 1

What are lease payments?

Answer 1

This can be considered as rent that are recognized as revenue by the lessor on a straight-line (S/L) basis over the lease term.

Question 2

What is an operating lease?

Answer 2

This is simply a contract that allows the use of an asset by the renter or tenant but does not convey ownership of the asset.

Question 3

What are the terms under finance lease?

Answer 3

In finance lease the lessee records a right-of-use (ROU) asset and a lease liability which is equal to the present value of the lease payments. ROU is typically amortized on a straight-line basis over the shorter of the leased asset’s useful life or the lease term.

Question 4

How do you calculate finance lease: lessee interest expense?

Answer 4

Interest Expense = lease liability * interest rate * time period(months outstanding/12 months)

Question 5

What happens when the first payment of a finance lease is made?

Answer 5

When the first payment of a finance lease is made at lease inception, it is applied to the lease liability

Question 6

What are leasehold improvements?

Answer 6

This is when a lessee(i.e renter) pays for any enhancements (eg, interior walls, electrical fixtures, plumbing) to their leased space.

Question 7

How are leasehold improvements treated?

Answer 7

They are capitalized and depreciated.

Question 8

How do you calculate lessee expense: straight-line lease expense?

Answer 8

Monthly lease expense = total lease payments/months in lease term.

Question 9

What happens when the first lease payment is made at lease inception?

Answer 9

When the first lease payment is made at lease inception, the lease liability is reduced by the entire payment amount simply because interest expense has not been incurred yet.

Question 10

What is the criteria used by the lessor and lessee to determine the type of lease?

Answer 10

Mostly the criteria used to determine whether a lease is a sales-type lease are the same criteria used by a lessee to determine if it has a finance lease.

Question 11

What are the operating lease components for lessee accounting?

Answer 11

1. ROU Asset and Lease liability - recorded at pv of lease payments.
2. Prepaid Rent - Prepaid asset until recognized as rent.
3. Refundable security deposit - Long-term receivable.
4. Leasehold Improvements - Capitalized and amortized over the shorter of remaining lease term or useful life.
5. Lease (rent) expense - Expensed uniformly over lease term on straight-line basis.

Question 12

What is a finance lease?

Answer 12

It transfers the rights and risks of ownership of a leased asset from the lessor to the lessee.

Question 13

When can a lessee account for a finance lease?

Answer 13

In order to do so, it has to meet at least one of the five SPECIAL-PO-T-75-90 criteria.

1. Specialized nature of leased property - means the property has no foreseeable alternative use to the lessor at the end of the lease term.
2. Purchase Option in the lease that is reasonably certain to be exercised.
3. Title of the property transfers to the lessee by the end of the lease term.
4. Lease term is a major part of the remaining economic life of the property.(i.e > 75%)
5. Present value of lease payments substantially all of leased item’s fair value (>90%)

Question 14

What is the treatment on a lease with a purchase option?

Answer 14

A lease with a purchase option likely to be exercised is also known as a finance lease.

Question 15

How do you calculate lease liability/payments?

Answer 15

Lease liability = the present value of lease payments, including the purchase option, any nonrefundable fees, and any residual value guarantee.

Question 16

What is a Right-of-use ROU?

Answer 16

This is simply an asset recorded for a lease that includes the lease liability’s initial measurement.(i.e at present value of lease payments).

Question 17

How do you calculate the profit on sales-type lease?

Answer 17

Profit = lease receivable(PV of lease payments) - Carrying value of leased asset.