Leases

Question 1

What are the requirements for a short term lease by the lessee?

Answer 1

• Lease term is 12 months or less

- Exemption disallowed if purchase option exercise is reasonably certain.

Question 2

How are short term leases recognized by the lessee?

Answer 2

• No asset or liability recorded;

- Lease payments on straight line

Question 3

What are the footnote requirements for short term leases by the lessee?

Answer 3

Future minimum rental commitments; by year - for 5 years

Question 4

What is a Right of Use (ROU) asset?

Answer 4

Lessee has the right of use for the underlying asset throughout term of the lease.

Question 5

How is an operating lease determined (lessee)?

Answer 5

None of the criteria for finance lease satisfied and lease term is longer than 12 months.

Question 6

Where are operating leases booked? (lessee)

Answer 6

ROU asset and lease liability are recorded in financial statements.

Question 7

What are the requirements for a sales-type lease? (Lessor)

Answer 7

Same POETS as finance lease:

Present value
Option to purchase
Economic Life
Transfer of ownership
Specialized nature

Question 8

What does a lessor recognize in a sales type lease?

Answer 8

• Net investment in lease
• Selling profit or loss
• Initial direct cost as expense

Question 9

What are the requirements for a direct financing lease? (Lessor)

Answer 9

• None of the criteria satisfied for sales - type lease
• Satisfies both criteria:
  
  • Present value of lease payments + residual value guaranteed = fv of asset
  • Collectability of lease payments is certain

Question 10

How do you calculate the net investment in lease? (Lessor)

Answer 10

Net investment in lease = PV of guaranteed and unguaranteed residual value - selling profit

Question 11

What are the requirements for an operating lease? (Lessor)

Answer 11

None of the criteria for sales0type lease or direct financing lease satisfied.

Question 12

Where are operating leases recorded? (Lessor)

Answer 12

Asset on Lessor’s balance sheet and depreciated periodically.

Question 13

What are the requirements for a sale-leaseback?

Answer 13

• A contact exists.
• Seller-lessee satisfies performance obligation by transferring control of assets to the buyer-lessor.
• Leaseback must be an operating lease.

Question 14

What is an annuity due?

Answer 14

Payments begin at the start of the lease. Ex. Rent is due at the first of the month.

Question 15

What is an ordinary annuity?

Answer 15

Payments begin after the end of the first year. Ex. An annuity pays you at the end of the year.