Leases Flashcards
How is leasehold improvement dealt with?
It should be amortized over the remaining life of the lease, or over the useful life of the improvements, whichever is shorter. The remaining life of the lease should include periods covered by a renewal option if it is probable that the option will be exercised
What is a direct finance lease
A lease arrangement between a non manufacturer or non dealer and a customer wherein the lessor acquires equipment for the purpose of leasing it and generating revenue through interest payments. In a DFL, the book value of the lessor’s asset is equal to its market value.
What is an operating lease
A lease that does not transfer the risk and rewards of ownership to the lessee. The leasee (renter) records rent expense; the lessor (owner) records rent revenue. The asset remains on the lessor’s books
What is a capital lease
A lease that transfers the risks and rewards of ownership to the lessee. The lessee places the asset and lease liability on its books and recognizes interest expense and depreciation over the lease term.
The lessor removes the asset from its books, replaces it with financial asset, and recognized interest revenue over the lease term.
What is the guaranteed residual value
This is a clause typically found in lease agreements in which there is no bargain purchase option or transfer of title. If the lessee guarantees the residual value, the lessee is responsible for the condition of the asset at the conclusion of the lease term. If no guaranteed residual value in the lease agreement, the order is not responsible for the condition of the asset at the conclusion of the lease agreement. Third parties may also guarantee residual values
What is an unguaranteed residual value?
It is the expected salvage value of the leased asset at the end of the term that has not been guaranteed
What is the minimum lease payment from the perspective of the lessee and lessor
Lessee: this is the payment the lessor is expected to make under the lease payment.
Lessor: same as for lessee plus residual value guaranteed by 3rd party.
What are the two types of capital lease for the lessor?
- Direct financing lease
2. Sales type lease
What is a sales type lease
The lessor derived two type of income- interest income or revenue and dealers gross profit, which is recognized at the inception of the lease.
What are the period costs incurred by a lesser with a capital lease
- Interest expense
- Amortization expense
- Executory costs - insurance, maintenance
What are the components of the lessee’s Min lease payment?
- The annual lease payment
- Bargain purchase option
- If no BPO exist, any residual value guaranteed by the lessee at the expiration of the lease term
- Any penalty payment the lessee is required to make for not renewing the lease term.
- Excluded are payment required by the lessee for damage, extraordinary wear and tear, or excess usage because they cannot be estimated. They are treated as expenses or losses in the period incurred.
What are the components of the lessors min lease payment
Same as for lessee plus
6. Include any residual value guaranteed by 3rd party
Note: un guaranteed residual is not included for lessee or lessor.
What journal entry is recorded by the lessor at inception
Dr. Lease receivable that is is the sum of min lease payment + any un guaranteed residual value
Cr. Unearned interest revenue - total interest over term
Cr. Asset I.e market value = cost value
What is the journal entry for the lease at inception for a direct financing capital lease.
Dr. Leased asset - present value of min lease payments
Cr. Lease liability- present value of min lease payment
What journal entry is recorded by the lessor at inception for a sales type lease
Dr. Lease receivable - sum of min lease payment + any unguaranteed residual
Dr. Unearned int revenue - total interest over term
Cr. Sales I.e market value = selling price
Dr. Cost of goods sold I.e cost of asset
Cr. Asset at cost of asset
