Leases Flashcards

2
Q

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What are the characteristics of a capital lease for a lessee?

A

Risk of ownership passes to lessee by:

Title

Bargain Purchase Option (BPO)

Substance: Lease is more than 75% of asset’s useful life or PV of minimum lease payments are more than 90% of fair value

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3
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How is a capital lease recorded?

A

Capitalize at cost:

Asset & Liability Recorded at Present Value of Future Lease Payments

Discount Rate = Lesser of Implicit Rate in the Lease or Market Rate

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4
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What footnote disclosures are required for a capital lease?

A

Future minimum rental commitments

By year – for 5 years

All remaining years as a group

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5
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What are the requirements for a capital lease for a lessor?

A

Same as for lessee (Title- BPO or Substance)- PLUS:

Collectibility of lease payments is predictable

No uncertainties about the lessor reimbursing the lessee for costs incurred

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6
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What are the characteristics of an operating lease for a lessee?

A

Risk of ownership does NOT pass

No asset or liability is recorded on the financial statements

Leasehold improvements - capitalized and depreciated over the lesser of lease life or leasehold improvement’s life.

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7
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What are the characteristics of an operating lease for a LESSOR?

A

Rent revenue recorded

Leased property remains an asset and depreciated by lessor

If payments fluctuate over the term of the lease- rent revenue recognized on a straight line basis

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8
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What are the characteristics of a direct financing lease?

A

Interest Revenue (or expense for lessor) decreases with passage of time

Principal amount increases with each payment

Carrying amount of Lease decreases

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9
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How is a sale-leaseback recorded?

A

Any profit on the sale is deferred and amortized

Exception: If PV of lease payments is 10% or less of the asset’s FMV- the gain is recognized

If PV of lease payments is greater than 10% of FMV and the lease is operating- all of the gain is recognized except the amount of the PV of the lease payments

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10
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What are the characteristics of lease payments under an annuity due situation?

A

Payments begin at the start of the lease period

Think: Rent/Mortgage payments are Due at the first of the month

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11
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What are the characteristics of lease payments under an ordinary annuity situation?

A

Payments begin after the end of the first year

Think: An annuity that pays you at the end of each year

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