Leases, Liabilities and Bonds Flashcards
Capital / Finance Lease = purchase/ownership.
Journal entry? OWNS?
condition to capitalize JE:
Fixed Asset (leased prop): Xx
Liability (obligations under lease) Xx
O- ownership transfers at end of lease (upon final payment or required buyout)
W- Written option for bargain purchase (AKA option to buy not at fair val, but at a bargain val.)
N- Ninety (90%) of leased property Fair Val = PV Of lease payments
S- Seventy-five (75%) or MORE of asset economic life must be committed to the lease. (EG 10 yr lease term, 12 yr economic life)
**for GAAP capital leases, ALWAYS amortize leased property over economic (and not lease-length) life of lease.
Profit in lease transactions?
PVal of Payments
(Less)
Carrying Cost
What is true of a lease capitalized due to “Transfer of Title” or bargain purchase?
Use life of the ASSET, not life of the lease.
What is a ‘Bargain Purchase Option’?
A bargain purchase option is an option in a lease agreement that allows the lessee to purchase the leased asset at the end of the lease period at a price substantially below its fair market value.
The bargain purchase option is one of four criteria, any one of which, if satisfied, would require the lease to be classified as a capital or financing lease that must be disclosed on the lessee’s balance sheet.
The objective of this classification is to prevent “off-balance sheet” financing by the lessee.
Amortizing leasehold improvements?
Either LESSER remaining life of lease, or length to which improvement
Present Value of $1
Amnt that must be invested NOT - so that $1 can be paid/received in the future
(Capital lease buyout at end of lease, bond principal payoff at end of term, US Savings bond)
PV = ANNUAL RENTS x Annuity due PV factor
Once you have annual rents, you multiply by pd. to get to “Gross”, then do gross-net inv.
Future Value of $1
“Compounded Interest” - the amount that would accumulate at a future point if $1 is invested now
- Interest factor causes the future value of $1 to be greater than $1
(Bank savings accounts)
Present Value of an Ordinary Annuity
Current WORTH of a series of identical periodic payments to be made in the future…
(Periodic lease payments, periodic bond payments, winning the lottery)
Future value of an ordinary annuity
SUM, to be received at some pt in the future, of the identical periodic investments made from the present until the future point.
(eg, investing in an IRA)
Interest Rate
When calculating the PVal of the minimum lease payments, the lessee uses the (lower) of:
1) implicit rate (if known)
2) lessee’s incremental borrowing rate (the rate available in the market to the lessee)
Depreciating leased assets?
Cap Lease Assets (less) Sal Val = Depreciable Basis / periods of benefit =
Dep expense per period
Gross Investment
= Minimum Lease Payment + unguaranteed residual val. = lease payment receivable (to lessor)
Net Investment
“Principal”
Gross Investment x PV
Unearned Interest Rev.
Gross investment - net inv.
What should you do with bonus to obtain lease?
Amortize (by month) over life of lease
Capital leaseback?
Operating leaseback?
In a capital leaseback, deferred Gain/Loss is amortized in proportion to the amortization of the leased asset.
Operating: Def gain/loss is amortized in proportion to gross rental expense over life of lease.
Rules abt. deferred gain?
When the seller-lessee retains only a minor portion (PV of leaseback is 10% or less FV of selling price,) any gain should be recognized immediately and none deferred.
How should you record “lease liability” for capital finance lease at beginning of lease term?
Lessee should record at LOWER of
1) Pval minimum lease payments (annual payment x PV factor)
2) FV of assets at inception of lease
How to capitalize a bargain purchase option?
EG:
BP = 10000
Pval of 12% at 10 years = .322
Add this bargain purchase val to “lease liability” at beginning of a lease term.
Rule about unearned interest in a sales-type lease?
Amortized over pd of lease using interest method:
EG, each year you capitalize “interest” based on carrying rate of lease (lessing out lease payments made annually.)
Depreciation on leased assets.
Use life of lease (and not economic life) if lessee does NOT take ownership of the asset by the end of lease, OR if there is no bargain purchase option.
(and always use pval of Minimum Lease Payments to calculate)
Capitalized Val of Lease
(Less) Sal Val = Depreciable Base / 8 year useful (economic) life
Revaluation Gain/(Loss) Calc?
420 FAIR ALUE
(less)
360 Carry Val =
60K gain,
To be recognized in Other Comprehensive Income.
Leaseback deferred gain?
Defer the gain from a lease-back over the life of lease-back.
Possible deferred gain = Sales Price (LESS) Carrying amount
Times this applies for IFRS:
- Finance Lease
- sales price EQUAL TO or BELOW Fair val.
What are the rules about operating lease payments to a lessor that should be DEFERRED?
When to defer:
- security deposits
- prepaid rent
- unamortized portion of non-refundable payments to the lessor for lease-hold modifications
