Leases Flashcards
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What are the characteristics of a capital lease for a lessee?
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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How is a capital lease recorded?
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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What footnote disclosures are required for a capital lease?
Future minimum rental commitments
By year – for 5 years
All remaining years as a group
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What are the requirements for a capital lease for a lessor?
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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What are the characteristics of an operating lease for a lessee?
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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What are the characteristics of an operating lease for a LESSOR?
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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What are the characteristics of a direct financing lease?
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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How is a sale-leaseback recorded?
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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What are the characteristics of lease payments under an annuity due situation?
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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What are the characteristics of lease payments under an ordinary annuity situation?
Payments begin after the end of the first year
Think: An annuity that pays you at the end of each year
