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ACYFAR 3 > LEASES > Flashcards

LEASES Flashcards

To be able to master the concepts of leases.

1
Q

What are the four circumstances that a lease is under a finance lease?

A

T - Transfer of ownership
O - Option to purchase the asset
M - Material lease term
S - Substantial PV of Lease Payments
S - Specialized Nature (only lessee can use without major modifications)

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2
Q

What makes the option to purchase the asset a finance lease?

A

When it is reasonably certain that the lessee will exercise the option to purchase the asset.

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3
Q

What is a material lease term?

A

That is if the lessee decides to lease an asset for at least 75% of the asset’s Useful Life.

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4
Q

How do you identify a substantial present value of lease payments?

A

The present value must be at least 90% of the FV.

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5
Q

Who recognizes depreciation expense on an operating lease?

A

Lessor

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6
Q

How do you treat the initial direct cost paid by the lessor?

A
  • Added to Carrying Amount of the Asset
  • Expensed over the LEASE TERM
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7
Q

How do you treat the initial direct cost paid by the lessee?

A

Ignore

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8
Q

What are the costs that are incurred by the lessor to maintain the asset?

A

Executory Costs

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9
Q

How do you treat executory costs?

A

Expensed as incurred

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10
Q

How do you recognize refundable security deposits?

A

Liabilities

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11
Q

The extra consideration that the lessee gives the lessor in order to rent an asset that has other competing lessees.

A

Lease bonus

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12
Q

How do you recognize lease bonus?

A
  • Unearned revenue (liability)
  • Amortized income over the lease term
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13
Q

When the lease term starts at the middle of the period (ex: March 1), what is the main treatment of the following:

  1. Rent Income
  2. Initial Direct Costs
  3. Executory Costs
A
  1. Rent Income: multiplied by 10/12
  2. Initial Direct Costs: multiplied by 10/12
  3. Executory Costs: whole amount because it’s expensed as incurred
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14
Q

The type of finance lease that is merely engaged in the financing business.

A

Direct Finance Lease

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14
Q

What are the two types of finance lease?

A

Direct Finance Lease
Sales Type Lease

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15
Q

What income does the lessor get in a direct finance lease?

A

Interest Income or financing income

16
Q

The type of finance lease wherein the lessor is either a manufacturer or dealer.

A

Sales Type Lease

17
Q

The two types of income to be earned in a sales type lease.

A

Gross Profit
Interest Income

18
Q

How do you solve for the Gross Profit?

A

GP = Sales - COGS

19
Q

How do you solve for the Adjusted Gross Rentals

A

Annual Rental x Lease Term = Gross Rentals
Add: Residual Value (only for M and S)

20
Q

When is the residual value considered when it comes to the gross rentals?

A

If it is not classified under the T or O in TOMS
or
If it does not have transfer of ownership or option to purchase

21
Q

When the finance lease falls under the option to purchase, what is added to the gross rentals instead of the residual value?

A

Option Price

22
Q

When is the residual value added to the gross rentals when it comes to a finance lease?

A

If it is classified under M or S
or
If it falls under the classification of a material lease term or a substantial present value of the fair value

23
Q

How to solve for Gross Rentals, when the annual rental is not given?

A

Costs of the Asset
Less: PV of the residual Value
——————————————-
PV of Rentals
Divide: PV Factor
——————————————-
Annual Rental

24
Q

How to solve for the Net Investment under the Direct Finance Lease?

A

Cost of the Asset
Add: Initial Direct Cost paid by the Lessor
——————————————-
Net Investment

25
Q

In a lease contract, what is the right given to the lessee?

A

Right to control the use

26
Q

What are the two requisites for a lease contract?

A
  • Identified Asset
  • Right of the lessee to control the use of the asset
27
Q

In an identified asset there are two requisites. What are these two requisites?

A
  • Asset is implicit or explicit
  • Lessor cannot substitute the asset
28
Q

What is the source of income for a direct financing lease?

A

Interest Income

29
Q

What are the sources of income for a sales type lease?

A
  • Interest Income
  • Gross Profit

ACYFAR 3 (8 decks)

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