Leases

Question 1

When a finance lease contains a purchase option, over what period of time should the lessee amortize the leased property?

Answer 1

The lessee should amortize the right-of-use (ROU) asset over its useful life.

Question 2

What are initial direct costs?

Answer 2

The incremental costs of a lease that would not have been incurred if the lease had not been obtained.

Question 3

How are initial direct costs reported?

Answer 3

• capitalized, not expensed
• does not include internal costs
• external incremental costs only, Ex: Commissions and payments made to current tenants to obtain the lease
• lessee includes IDC in the measurement of right-of-use assets
• IDC = initial direct costs

Question 4

What are the components of a lease receivable for lessor involved in a direct financing lease?

Answer 4

The lease payments plus residual value

Question 5

How does a lessor measure the lease receivable in a direct financing lease?

Answer 5

By the sum of the following amounts:

• the lease payments
• the unguaranteed residual value accruing to the benefit of the lessor
• the guaranteed residual value by the lessee or third party

Question 6

What two conditions must be met for a contract modification to be accounted for as a new lease?

Answer 6

1. The right to use a new asset is obtained
   and
2. Lease is priced at standalone market price

Question 7

If a lease is an operating lease, how are the lease payments recorded?

Answer 7

As rent expense

Question 8

How are sales-type leases with selling profit recorded for a lessor?

Answer 8

Lessor will, at the beginning of the lease:

• derecognize the asset
• record sales revenue
• record cogs
• record lease receivable (which is the net investment in the lease)

Question 9

What is the accounting for initial direct costs with an operating lease?

Answer 9

Lessor: Defer and amortize over the life of the lease

Lessees: Defer and amortize over the life of the lease

Question 10

What is the accounting for initial direct costs with finance leases?

Answer 10

Lessor:
Sales type with profit- recognize IDC at inception
Sales type no profit & direct financing - defer and amortize over the life of the lease

Lessee: do not use sales type classification
Finance: defer and amortize over the life of lease

Question 11

For a sales-type lease with selling profit, how are initial direct costs accounted for?

Answer 11

Expenses at the beginning of the lease

Question 12

What are initial direct costs?

Answer 12

Costs incurred by the lessor that are associated directly with originating a lease, that are essential to acquire that lease, and would not have been incurred had the lease agreement not occurred.

Question 13

What is the 5 FASB criteria for a finance lease?

Answer 13

1. transfer of ownership
2. purchase option reasonably certain to exercise
3. lease term is the major part of the economic life of the asset
4. present value of the lease payments is substantially all of the fair value
5. there is no alternative use for the asset