Leases

Question 1

How is a Capital Lease recorded?

Answer 1

Capitalize at cost: Asset & Liability Recorded at Present Value of Future Lease Payments

Question 2

What footnote disclosures are required for a Capital Lease?

Answer 2

Future minimum rental commitments

By year - for 5 years

All remaining years as a group

Question 3

What are the requirements for a Capital Lease for a lessor?

Answer 3

Same as for lessee (OWNS)

Lessee “OWNS” the leased property (meets 1 of the 4)

Uncertainties do not exist regarding any unreimbursable costs to be incurred by the lessor

Collectability of the lease payments is reasonable predictable

Question 4

What are the characteristics of an Operating Lease for a lessee?

Answer 4

Risk of ownership does NOT pass

No asset or liability is recorded on the financial statements

Leasehold improvements - capitalized and depreciated over the lesser of lease life or leasehold improvement’s life.

Question 5

What are the characteristics of an Operating Lease for a LESSOR?

Answer 5

Rent revenue recorded

Leased property remains an asset and depreciated by lessor

If payments fluctuate over the term of the lease- rent revenue recognized on a straight line basis

Question 6

What are the characteristics of a Direct Financing Lease?

Answer 6

Interest Revenue (or expense for lessor) decreases with passage of time. Principal amount increases with each payment. Carrying amount of Lease decreases

Question 7

How is a sale-leaseback recorded?

Answer 7

Any profit on the sale is deferred and amortized Exception: If PV of lease payments is 10% or less of the asset’s FMV - the gain is recognized If PV of lease payments is greater than 10% of FMV and the lease is operating- all of the gain is recognized except the amount of the PV of the lease payments

Question 8

What are the characteristics of lease payments under an annuity due situation?

Answer 8

Payments begin at the start of the lease period. Think: Rent/Mortgage payments are Due at the first of the month

Question 9

What are the characteristics of lease payments under an ordinary annuity situation?

Answer 9

Payments begin after the end of the first year Think: An annuity that pays you at the end of each year

Question 10

What are the characteristics of a Capital Lease for a lessee? “OWNS”

Answer 10

Ownership transfers at end of lease

Written bargain purshase option

Ninety percent of leased property < pv of lease pmts

Seventy-five % asset life

only one condition must be met to qualify as capital lease

Question 11

How is free or reduced rent consideration accounted for by the lessor?

Answer 11

Divide total rental income to be received over the entire life of the lease and divide it evenly over each period