Leases Flashcards
What is a lease? Pg. 11-1
A lease is a contract, which connveys the right to possess and use the lessor’s porperty for a specified period of time in return for periodic cash payments
What is an operating lease? Pg. 11-1
It is a “true rental”; rights and risk of ownership do not transfer; lessor pays for depreciate, taxes, insurance, and maintenance
How do you determine a if its a capital lease for lessee or non-operating lease for lessor ? Pg. 11-3
- If capital lease, what lessee can do?
- If not a capital lease, what is it considered?
- When does 75 or 90 wont work?
TT-BPO-75-90; subject VS form
TT Title transfers: lessee will own the asset
BPO Bargain purchase option
75 Lease term is equal to 75% or more of its economic life
90 PV of the minimum lease payments is equal to 90% or more of the FMV of the property at inception
- Depreciate, use in taxes, insurance, and maintenance
- Operating lease
- If beginning of the lease term falls within the last 25% total economic life
What qualifies as a non-operating lease for the LESSOR?
Pg. 11-5
Name two types of non-operating leases for the LESSOR
TT-BPO-75-90 plus…
BOTH
1) Collectible
2) Measurable
1) Sales type lease: uses the lease as a way of selling the asset on an installement
2) Direct financing lease: only interest income arises; there is NO MANUFACTURERS DEALER PROFIT!!! (ie. car is bought in dealers cost, so only make money on financing interest rates)
When leases involve land only, what will lessee consider in classifying the lease? (Online book)
When leases involve land and building, what will lessee consider in classifying the lease?
- If not TT or BPO then it is considered a operating lease
- If TT then sales type lease if there is profit, or a direct financing lease if NO profit
- If BPO, the lessor will account as operating or direct financing lease
*If FV of land is greater than or equal to 25% the land and the building are considered separately; if not, land is not significant
What is a sale-leaseback? Pg. 11-6
What should you think about when you see this type of problem?
You sell the asset for money, but you still want the asset, so you lease it back
Make sure you defer the gain to help reduce depreciation expense (capital) or rent expense (operating)
What you encounter a lease problem for non-operating/capital, what should you consider? Pg. 11-3
a) For Lessor
b) For Lessee
a) Always use the IMPLICIT RATE
b) Record the lease lower of FMW or PV of the minimum lease payment (also PV of residual value if present, and include PV BPO); then use the incremental borrowing rate or if lower and known use the implicit rate
* For fair value DON’T use EXECUTORY COSTS (taxes, insurance, and maintenance)
* Include FV of BPO
How do you treat a leased asset that has to be depreciated that has a salvage value?
Subtract the salvage value from the leased asset
In table for Pg. 11-4 when do you subtract minimum lease payment from lease liability, and when should you not include it?
Subtract when the payment is made immediately, since interest will not be affected
Don’t subtract when the payment is made in the end of the period since interest will be effected
What is BPO? Pg. 11-3
Option to purchase lease asset for below FMV; must be included when recording leased asset => along with PV of the minimum leased payments
When do you not defer a gain in a sale-leaseback?
Pg. 11-6
When PV of rental payments is <10% of FV
How do you depreciate a leased capital asset Pg. 11-4
a) For TT/BPO
b) 75/90
a) Depreciate over useful life; take out salvage value
b) Depreciate over shorter of useful life or lease term; ignore salvage value
How do you find lease libility? Pg. 11-11
Think of effective interest table, and find present value of leased liability (first column)
For a capital lease, how do you depreciate…Pg. 11-3
a) TT / BPO
b) 75% / 90%
a) Useful life
b) Shorter of useful life or lease term
What rate does the LESSOR use to PV lease payments? Pg. 11-3
ALWAYS IMPLICIT!!!
