Leases Flashcards
What is the deferred gross profit in a lease?
FV - CV
What are the 5 criteria of a lease?
If ownership transfers at the end of the lease
• If there is a purchase option at the end of the lease that the
lessee is reasonably certain to exercise
• If the lease term is greater than or equal to 75% of the useful
life of the leased asset
• If the present value of the lease payments is greater than or
equal to 90% of the FMV of the leased asset
• If the asset is specialized in nature such that is has no
alternative use to the lessor after the lease
How do you calculate the present (market) value of annual lease payments?
Annual payments x the PV factor = Market value
Under the gross method in leases, how is unearned interest calculated?
Cash payments - PV of lease payments
What are the lessor JE? Sales type lease Annuity due Equip FV 25,771 Equip cost 20,000 Implicit/borrowing rate 8% 3 yr lease/ useful life
Lease payment calculation
25,771= lease payment x 2.78326 25,771/2.78326 = 9259
1/1/01:
Dr lease AR 27,777 (9,259 x 3)
Cr unearned int. 2,006 (plug)
Cr sale. 25,771
Dr COGS 20,000
Cr equip. 20,000
Dr cash 9,259
Cr lease AR 9,259
12/31/01
Dr unearned int 1,321 [(25,771-9,259) x 8%]
Cr int revenue. 1,321
1/1/02
Dr cash 9,259
Cr lease AR 9,259
12/31/02
Dr unearned int 686 [(16,512+1321-9259)x8%]
Cr int revenue. 686
1/1/03
Dr cash 9,259
Cr lease AR 9,259
12/31/02
Dr unearned int 686 [(25,771-
What are the lessee JE? Sales type lease Annuity due Equip FV 25,771 Equip cost 20,000 Implicit/borrowing rate 8% 3 yr lease/ useful life
1/1/01
Dr asset 25,711 (2.78326 x 9,259)
Cr lease liability 25,711
Dr Lease liability 9,259
Cr cash. 9,259
12/31/01
Dr int exp 1,321 [(25,771-9,259) x 8%)
Cr lease liability 1,321
Dr amortization expense 8,590 (25,771/3)
Cr Asset. 8,590
01/01/02
Dr lease liability 9,259
Cr cash. 9,259
12/31/02
Dr int expense 686 [(16,512+1,321)x 8%]
Cr lease liability 686
Dr amortization expense 8,590
Cr asset. 8,590
1/1/03
Dr lease liability 9,259
Cr cash. 9,259
12/31/03
Dr amortization expense 8,590
Cr asset. 8,590
What has to happen for a failed sale lease to occur?
Owner of assets sales asset and immediately leases it, but control never transfers to the new owner.
JE for the seller-lessee
Dr cash
Cr NP
If a lease contains the bargain option price, in determining the capitalizable costs the minimum lease payments would be added to…?
It’s present value
Peg Co. leased equipment from Howe Corp. on July 1, year 1 for an eight-year period expiring June 30, year 9. Equal payments under the lease are $600,000 and are due on July 1 of each year. The first payment was made on July 1, year 1. The rate of interest contemplated by Peg and Howe is 10%. The cash selling price of the equipment is $3,520,000, and the cost of the equipment on Howe’s accounting records is $2,800,000. The lease is appropriately recorded as a sales-type lease. What is the amount of profit on the sale and interest revenue that Howe should record for the year ended December 31, year 1?
Profit is:
3,520,000 - 2,800,000 = 720,000
Interest Revenue:
3,520,000 - 600,000 (pmt) = 2,920,000 x 10% = 292,000 x 6/12 = 146,000
