Leases

Question 1

sale-leaseback

Answer 1

gain should be deferred when the seller-lessee retains the right to substantially all of the remaining use of the property (as in a capital lease). Or recognized immediately when seller-lessee transfers substantially all the risks of ownership (as in a true sale)

Question 2

sales-type (finance) lease - profit

Answer 2

the excess of the PV of the selling price over its cost is recorded as profit

Question 3

sale-leaseback

Answer 3

IF “major” sale-leasebacks - all gain is deferred (OWNS)

If “minor” - there is no deferral.

Question 4

capital lease

Answer 4

Interest revenue is recognized, based on the discount rate times the carrying value of the lease receivable. As time passes, the lease receivable decreases and interest revenue recognized also decreases.

Question 5

operating lease

Answer 5

Rent revenue is recognized

Question 6

capital lease under U.S. GAAP and is treated as if owned by the lessee:

Answer 6

1. The lease transfers ownership to the lessee by the end of the lease term.
2. The lease contains a bargain purchase option.
3. The present value at the beginning of the lease term of the “minimum lease payments” equals or exceeds 90% of the fair value of the leased property.
4. The lease term is 75% or more of the estimated economic life of the leased property.

Question 7

direct-financing lease

Answer 7

Lessors recording a lease receivable should include the minimum lease payments PLUS any residual value. The reason for this is because the lessor can also expect to collect this residual value from the lessee at the culmination of the lease.

Question 8

a sales-type lease

Answer 8

cost of goods sold is equal to the historical cost of the asset sold less the present value of the non-guaranteed residual value discounted over the life of the lease. By definition, cost of goods sold will be less than the historical cost of the asset sold.