LEASES Flashcards
To be able to master the concepts of leases.
What are the four circumstances that a lease is under a finance lease?
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)
What makes the option to purchase the asset a finance lease?
When it is reasonably certain that the lessee will exercise the option to purchase the asset.
What is a material lease term?
That is if the lessee decides to lease an asset for at least 75% of the asset’s Useful Life.
How do you identify a substantial present value of lease payments?
The present value must be at least 90% of the FV.
Who recognizes depreciation expense on an operating lease?
Lessor
How do you treat the initial direct cost paid by the lessor?
- Added to Carrying Amount of the Asset
- Expensed over the LEASE TERM
How do you treat the initial direct cost paid by the lessee?
Ignore
What are the costs that are incurred by the lessor to maintain the asset?
Executory Costs
How do you treat executory costs?
Expensed as incurred
How do you recognize refundable security deposits?
Liabilities
The extra consideration that the lessee gives the lessor in order to rent an asset that has other competing lessees.
Lease bonus
How do you recognize lease bonus?
- Unearned revenue (liability)
- Amortized income over the lease term
When the lease term starts at the middle of the period (ex: March 1), what is the main treatment of the following:
- Rent Income
- Initial Direct Costs
- Executory Costs
- Rent Income: multiplied by 10/12
- Initial Direct Costs: multiplied by 10/12
- Executory Costs: whole amount because it’s expensed as incurred
The type of finance lease that is merely engaged in the financing business.
Direct Finance Lease
What are the two types of finance lease?
Direct Finance Lease
Sales Type Lease
What income does the lessor get in a direct finance lease?
Interest Income or financing income
The type of finance lease wherein the lessor is either a manufacturer or dealer.
Sales Type Lease
The two types of income to be earned in a sales type lease.
Gross Profit
Interest Income
How do you solve for the Gross Profit?
GP = Sales - COGS
How do you solve for the Adjusted Gross Rentals
Annual Rental x Lease Term = Gross Rentals
Add: Residual Value (only for M and S)
When is the residual value considered when it comes to the gross rentals?
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
When the finance lease falls under the option to purchase, what is added to the gross rentals instead of the residual value?
Option Price
When is the residual value added to the gross rentals when it comes to a finance lease?
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
How to solve for Gross Rentals, when the annual rental is not given?
Costs of the Asset
Less: PV of the residual Value
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PV of Rentals
Divide: PV Factor
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Annual Rental
