Leases Flashcards
ASPE 3065 Capital Lease
Lower of borrowing n implicit rate
- BPO (should be lower than FV)
- Lease term > 75% of eco. life
- PV(min lease pmts) > 90%FV
NO COMPONENT COSTS
LOWER OF RATES
IAS 17 Capital/Finance Lease
At least one:
1. Title will transfer @ end of term
- BPO (should be lower than FV)
- Lease term > 75% of eco. life
- PV(min lease pmts) > 90%FV
- Specialized Equipment so it is made specifically for lessee
Lesse
All are cap under IFRS
ASPE 3065: oPTION OF CAPITAL OR OPERATING
On January 1, 20X6, Beatty Inc. entered into a lease to acquire some machinery. Beatty reports under IFRS and is the lessee. The terms of the lease are as follows:
Lease payments of $25,000 are made annually on the first day of the year for five years.
Included in the annual lease payments are maintenance fees of $2,000 per year.
The machinery reverts to the lessor at the end of the lease and the lease contains no renewal option.
Beatty’s incremental borrowing rate is 11% per year.
The lease’s implicit interest rate is 10%.
Beatty has made no election with respect to the non-lease component costs.
What is the balance of the lease obligation at January 1, 20X7?
a)
$56,210
Correct Answer
b)
$57,201
c)
$62,175
Incorrect Response
d)
$72,910
Answer d) is incorrect. This is the balance of the lease obligation at January 1, 20X6, not January 1, 20X7.
Answer b) is correct because the balance of the lease obligation at January 1, 20X7, is $57,201, calculated as follows:
PV of lease payment at Jan. 1, 20X6: PMT (beginning of period) = $23,000; N = 5; I/Y = 10%; CPT PV = 95,910
Date Annual lease payment Interest (10%) on unpaid obligation Reduction of lease obligation Balance of obligation
Jan. 1, 20X6 $95,910
Jan. 1, 20X6 $23,000 $0 $23,000 $72,910
Jan. 1, 20X7 $23,000 $7,291 $15,709 $57,201
Easten Co. leased a new forklift on January 1. This lease has the following details:
The lease agreement is for 10 years.
The annual payment of $5,000 is due at the beginning of each year.
Easten has the option to buy the forklift at the end of the lease for $1.
At the end of the lease, Easten may choose to return the forklift with no penalty.
This forklift sells for $35,000.
The interest rate implicit in the lease is 7%.
Easten follows ASPE and uses the effective interest rate method. What is the interest expense to be recorded for Year 1?
a)
2,280
b)
2,700
c)
3,150
d)
3,382
Answer b) is correct. The present value of the lease payments discounted at 7% is $37,576. (PMT = $5,000; N = 10; I/Y = 7%; CPT PV = $37,576). However, this amount is higher than the asset’s fair value. Since the leased asset cannot be recorded for more than fair market value ($35,000), a revised rate implicit in the lease must be recalculated using a present value of $35,000. (PV = –$35,000; PMT = $5,000; N = 10; CPT I/Y = 9%). Since the lease payment is paid at the beginning of the year, this first payment must be deducted, and interest expense is calculated on the net amount. Using this revised implicit rate of 9%, the first year’s interest is ($35,000 – $5,000) × 9% = $2,700.
You are discussing the classification of leases with Howie, a fellow associate at Burns and Pickle LLP. Which one of Howie’s statements regarding leases for a company reporting under ASPE is correct?
Incorrect Response
a)
A lease is a capital lease if the present value of the minimum lease payments is 75% or more of the fair market value of the property at the inception of the lease.
b)
If a lease has no bargain purchase option, it must be classified as an operating lease.
c)
From a lessee’s perspective, when determining the present value of the minimum lease payments, you only include annual lease payments.
Correct Answer
d)
When calculating the interest rate implicit in the lease, you include the minimum lease payments plus the unguaranteed residual value of the leased property.
Answer a) is incorrect. Where the lessor recovers substantially all of its investment in the leased property and earns a return on that investment (where the present value of the minimum lease payments is equal to 90% or more of the fair value of the leased asset), the lease is classified as a capital lease. Answer d) is correct because the discount rate implicit in the lease is the lessor’s internal rate of return at the beginning of the lease that makes the present value of the minimum lease payments plus any unguaranteed residual values equal to the fair value of the asset being leased.
To set up lease journal entries
Lessee
January 1, 20X4
Dr. ROU asset
$313,506 (from pv calc)
Dr. Prepaid insurance and maintenance
$3,000
Cr. Lease liability
$261,506
Cr. Cash
$55,000
To set up the lease.
Subsequent measurement of lease for lessee
Depreciation: Lower of: lease term and useful life
if u gon purchase it then useful life
Lease liability PMT IS SUBTRACTED, INTEREST EXPENSE IS ADDED
How to treat interest in lessee
Since pmt has already been deducted for y/e, you use end bal and for beg of year you deduct omt for that year
Derecognition
if bpo exercised amt is DR to the asset if not, then the amt is a loss or gain
Finance Lease Journal Entry
Dr. Lease receivable (net investment in lease)
XX
Dr. Cost of goods sold
XX
Cr. Revenue
XX
Cr. Equipment (inventory)
XX
Operating Lease Measurement
January 1, 20X5
Dr. Cash
$40,000
Cr. Deferred lease revenue
$40,000
To record receipt of the lease payment.
Dr. Equipment — leased
$150,000
Cr. Inventory
$150,000
To record the transfer of the equipment out of inventory to property, plant, and equipment.
December 31, 20X5
Dr. Deferred lease revenue
$40,000
Cr. Lease revenue
$40,000
To recognize lease income for the year.
(Alternatively, this entry could be made each month to recognize 1/12 of the revenue as it is earned.)
Effects on Financial Statement?
Operating
B/S none
I/S Lease Pmt
Tax no cca - Tax deductable
Capital Lease
BS - Asset & Liability
IS - interest n expense
Tax-no cca - Tax deducted
Why Lease over Buying?
- Better liquidity
- Less interest expense
implicit rate is less than borrowing rate - less risk
IFRS identify if lease
identified asset with right to use
direct use of asset
economic benefits
