Leases Flashcards
How is a sale-lease back recorded?
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 great than 10% of FMV and the lease is operating all the gain is recognized except the amount of the PV of the lease payments
What are the characteristics of a direct financing lease?
Interest Revenue (or expense for lessor) decreases with passage of time. Principal amount increases with each payment. Carrying amount of Lease decreases.
What are the characteristics of an operating lease for a LESSOR?
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.
What are the characteristics of operating lease for a LESSEE?
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.
What are the characteristics of lease payments under an annuity due situation?
Payments begin at the start of the lease period. Think: Rent/Mortgage payments are due at the 1st of month.
What are the characteristics of lease payments under an ordinary annuity situation?
Payments begin after the end of the 1st year. Think: an annuity that pays you at the end of each year
What are the characteristics of a capital lease for a lessee?
Risk of ownership passes to lessee by: TITLE. Bargain Purchase Option (BPO) Substance: Lease is more than 75% of asset’s useful life or PV of minimum lease payments are more than 90% of FV.
How is a capital lease recorded?
Capitalize at Cost: Asset & Liability recorded at PV of Future Lease Payments. Discount Rate = Lesser of Implicit Rate in the Lease or Market Rate
What footnote disclosures are required for a capital lease?
Future minimum rental commitment. By year - for 5 years. All remaining years as a group.
What are the requirements for a capital lease for a lessor?
Same as the lessee (Title, BPO or Substance), plus: Collectability of lease payments is predictable. No uncertainties about the lessor reimbursing the lessee for costs incurred.
