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FAR > LEASES (F6 M1-M3) > Flashcards

LEASES (F6 M1-M3) Flashcards

1
Q

In an OPERATING lease, the LESSEE records

A

-rent expense only on an accrual basis (usually straight line)

DR. rent expense
CR. cash/rent payable

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2
Q

Leasehold improvement

A
  • permanently affixed to the property and reverts back to lessor at the termination of lease. (painting on a wall is not a leasehold improvement)
  • not moveable from premise
  • ex: air conditioning ducts, tiles.
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3
Q

Lessee treatment of leasehold improvement

A

capitalize and depreciate over the LESSER of the lease life or the asset/improvement life

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4
Q

Lease bonus

A
  • Prepayment for future expenses
  • LESSEE records as an asset (deferred charge) and amortizes over life of lease.
  • LESSOR records as a liability and amortizes to income over life of lease
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5
Q

Rent kicker

A
  • Premium rent payment (percentage of sales)

- Period expense

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6
Q

Refundable security deposit

A
  • LESSEE reports as an asset (receivable) until refunded

- LESSOR records as a liability

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7
Q

Nonrefundable security deposit

A
  • LESSEE records as an asset (prepaid lease expense) until lessor determines that it has been earned
  • LESSOR records as unearned revenue until earned
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8
Q

LESSEE JE for free/reduced rent

A

First 6 months of a 5 year lease is free:

-months 1-6:
Dr. rent expense
Cr. rent payable

-months 7-60:
Dr. rent expense
Dr. rent payable (reverses above)
Cr. cash

rent expense stays the same throughout the lease

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9
Q

In an operating lease, the LESSOR records

A
  • rental income on accrual basis

- depreciation expense

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10
Q

LESSOR JE for free/reduced rent

A

First 6 months of a 5 year lease is free:

-months 1-6:
Dr. rent receivable
Cr. rent income

-months 7-60:
Dr. cash
Cr. rent receivable (reverses above)
Cr. rent income

rent income stays the same throughout the lease

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11
Q

Operating lease disclosures

A

For LONG TERM leases (greater than one year):
-minimum future rental payments per year for next 5 years and TOTAL rental payments in aggregate

ALL operating leases:

  • schedule of total rental expense
  • basis of rent kicker (contingent rental payments)
  • terms of renewals, purchase options, and escalation clauses
  • restrictions imposed by lease agreement
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12
Q

LESSEE capital lease criteria and treatment

A

Meet one of four:

  1. ownership transfers at the end of the lease
  2. written option for bargain purchase
  3. PV of lease payments >= 90% of FV of leased property (do this one last)
  4. lease term >= 75% of asset’s economic life

if met:

  • must record asset and depreciation/liability and interest expense
  • no rent expense

Dr. Fixed asset
Cr. Liability - obligation under capital lease

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13
Q

Capitalized amount for LESSEE under capital lease

A

Lessee records an asset/liability at the LESSER of:

  • fair value of asset at inception of the lease
  • cost (PV of minimum lease payments)
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14
Q

Minimum lease payments calc

A

using lower of rate implicit in the lease (if known) and lessee’s incremental borrowing rate

PV of annuity of required payments
+ PV of 1 of bargain purchase option
+ PV of 1 of guaranteed residual value

if annuity due, 1st payment all goes to principal reduction

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15
Q

Executory costs

A

insurance, maintenance and taxes

excluded under gaap.
added to capitalized amount under IFRS

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16
Q

Depreciation for LESSEE under capital lease

A

capitalized lease assets
-salvage value
/periods of benefit

periods of benefit =
OW = life of asset
NS = life of lease

17
Q

Depreciable life under capital lease

A

under both gaap and ifrs:

periods of benefit =
OW = life of asset
NS = life of lease/lease term

18
Q

Capital lease disclosures

A
  • assets, accumulated amortization and liabilities
  • current amortization charges to income
  • gross amount of assets recorded under capital lease
  • future minimum lease payments in aggregate and for each of the next 5 years showing deductions for executory costs
19
Q

LESSOR capital lease criteria

A

under GAAP, must meet all three:

  1. Lessee “owns”
  2. uncertainties do not exist regarding unreimbursable costs
  3. collectibility is reasonably predictable

Under IFRS, lessor copies lessee

20
Q

sales type capital lease

A

FV > CV so profit on sale and interest income recognized

21
Q

direct financing lease

A

FV = CV so no profit, just interest income

22
Q

LESSOR - recording sales type lease

A

2 JE
Dr. lease payments receivable
Cr. Unearned interest income
Cr. Sales Revenue

Dr. COGS
Cr. Asset

  • lease payments receivable = gross investment = # of payments * pmt $
  • unearned interest income = different between undiscounted and discounted FCF (gross investment - net investment)
  • sales revenue = net investment = PV of gross invesment = present value of minimum lease payments (also = FV = cash selling price)
23
Q

LESSOR - recording direct financing lease

A

1 JE

Dr. lease payment receivable
Cr. Unearned interest revenue
Cr. Asset

24
Q

Profit on sale-leaseback when PV of pmts >= 90% of FV

A
  • usually considered a capital lease

- defer ALL gain and amortize over asset life

25
Q

Profit on sale-leaseback when PV of pmts >10% and <90% of FV

A
  • could be operating or capital lease
  • recognize EXCESS gain only. defer/amortize the rest

sales price

=tentative gain

=excess gain

26
Q

Profit on sale-leaseback when PV of pmts <10% of FV

A
  • usually considered an operating lease

- recognize all gain, defer zero

27
Q

operating lease excess profit in sale-leaseback

A

sale price

=tentative gain
*
=excess profit (recognize now)

*leaseback asset = PV of minimum lease payments

28
Q

operating lease excess profit in sale-leaseback

A

sale price

=tentative gain
*
=excess profit (recognize now)

*leaseback asset = PV of minimum lease payments

29
Q

Treatment of LOSS in sale-leaseback

A
  • if real economic loss (FV < BV), recognize immediately

- if artificial loss (SP < FV), defer and amortize over leaseback period

30
Q

Amortization of gain in CAPITAL sale-leaseback

A

amortize over ASSET LIFE

lessee “owns”

31
Q

Amortization of gain in OPERATING sale-leaseback

A

amortize over LEASE LIFE

lessee does NOT “owns”

32
Q

treatment of sale-leaseback gain under IFRS

A

Finance Lease - lessee “owns”: defer all profit and amortize over lease term

Operating lease - lessee does not “owns”: recognize gain

FAR (15 decks)

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