Leases Flashcards
What are the two types of leases?
Operating - basically a rental agreement ;; no transfer of ownership
Capital/finance - treated as a sale ;; transfers mostly all of the benefits and risks in ownership of property to the lessee
Two types of capital leases
Sales type -
Direct financing lease -
Annual rental revenue
=total rental revenue from the lease allocated over the full life of the lease
Rev = total cash/#years
Nonrefundable lease bonus
-recognized over the life of the lease
Lessee rent expense
DR. rent expense
CR. Cash/rent payable
Lessor rental income
DR. Cash/rent receivable
CR. Rental income
Amortization of leasehold improvements
Should be over the life of the improvements or the remaining life of the lease - whichever is shorter
Lessee capital lease criteria (us gaap)
1 out of the 4 has to be met to capitalize (OWNS)
- ownership transfers at the end of the lease upon final payment or required buyout
- Written option for bargain purchase
- 90% rule (the present value of the lease payment is greater than 90% of the fair value of the leased property)
- 75%: the lease term is greater than 75% of the assets economic life
DR. Fixed asset-leased property
CR. Liability -obligation under cap lease
Guaranteed residual value
Relating to a cap lease
Guaranteed residual value is an additional lease payment and must be included in the calculation of the present value of the minimum lease payments.
What should lessors include in lease payments ?
Lessors (recording a lease receivable for direct financing) should include the minimum lease payments + any residual value
Sales type leases
Profit on sale. Present value Of payments exceeds the lessors carrying value
FV > CV
Direct financing leases
FV=CV
no profit just interest income
Rule for direct financing lease
Present value =
Carrying amount of receivable=
Cost of asset sold
Rule for sales type lease
Cost
+ profit
= present value = selling price=FV
Sales type unearned interest revenue
PV at inception of lease - initial payment =balance first year X interest rate = int. Rev. (12months) X months (ex. 6/12 or divide by 2) =int. Rev. Yr end
For the lessee, the lease must meet 1 out of the 4 conditions to capitalize
O ownership trnsfrs @end of lease
W written option for bargain
purchase
N ninety 90% rule- if PV of lease payments is greater than or equal to 90% of the cash price
S seventyfive 75%rule- the lease term is 75% or more of the useful life of the leased asset
Profit on sale
Present value of payments
- carrying cost
= profit on sale
Depreciation expense on leases asset
Usually of the lower %
When a lease is capitalized because of transfer of title or bargain purchase, depreciation is based on the life of the asset, not the lease. The cost includes the bargain purchase price
(Cost - Estimated FV at end) / life
Interest rate
When calculating the present value of the minimum lease payments -
Lessee uses the lower the
-rate implicit in the lease, if known
- or lessee’s incremental borrowing rate
What are the components of the lease receivable for a lessor involved in a direct financing lease ?
The minimum lease payments plus residual value
If title transfers after lease
Lessor does not depreciate only shows interest income.
Lessee depreciates and records interest rev
Manufacturers or dealers profit
Cash selling price of equipment
- cost of equipment at inception
=profit recognized on sale
Finance lease liability calculation
Lease payment x PV factor #
= FMV
- first payment
=lease liability
Depreciation years
Should always be lesser of lease life or useful life
EXCEPT
If there is a bargain purchase option
Sale-leaseback
When a company sells an asset and then leases it right back from the new owner.
Way to raise capital without issuing stock. Gets cash and then leases to continue use / operations. (Like a loan)
Sales leaseback - GAAP long term lease rule
Greater than or equal to 90% of FV, cap.lease, gain = defer all &amortize
Sales leaseback - GAAP in between term lease rule
<90% but >10%:cap or op.
Gain = defer gain up to PV of min lease pmts/cap asset
Recognize excess gain immediately
Gain-PV- defer
Exc. -now
Sales leaseback - GAAP short term lease rule
PV of rent pmts is 10% or less of FV/ op.
Gain = recognize immediately
