Leases

Question 1

Recording Depreciation

Answer 1

When do you charge over period of use vs period of lease?

Question 2

How to charge rental expense when lease payments begin later than the inception date

Answer 2

The inception of a lease is the date of the lease agreement. Rental expense should be as of that date. When the lease payments begin later than the inception date, the lease payments must be spread evenly over the longer period of time, which includes the months between the inception date and the beginning of the lease payments.

On June 1 of the current year, a company entered into a real estate lease agreement for a new building. The lease is an operating lease and is fully executed on that day. According to the terms of the lease, payments of $28,900 per month are scheduled to begin on October 1 of the current year and to continue each month thereafter for 56 months. The lease term spans five years. The company has a calendar year-end. What amount is the company’s lease expense for the current calendar year?

$28,900 × 56 months = $1,618,400
$1,618,400 ÷ 60 months = $26,973.33
$26,973.33 × 7 months (June through December) = $188,813

Question 3

Lease Depreciation

Answer 3

Since title to the leased asset passes to the lessee (Cole) at the end of the lease, Cole should depreciate the machine over the useful life of the asset (rather than over the shorter lease term) “in a manner consistent with the lessee’s normal depreciation policy.” The “cost” of the asset is the present value of the aggregate lease payments.

Question 4

Lease disclosures

Answer 4

Make some cards

Lessee vs lessor
Quantitative vs qualitative