Leases - SImulations

Question 1

Lessee Short Term Lease

Answer 1

Dr. Lease Expense

Cr. Cash or A/P

Question 2

Lessor Short Term Lease

Answer 2

Dr. Cash or A/R

Cr. Lease Revenue

Question 3

How Lessor calculates what to charge to lessee for operating lease

Answer 3

1. If there is unguaranteed residual value multiply by by present value and subtract from FV of item to be leased
2. Divide 1 by present value of factor of annuity

Question 4

How lessee calculates and records lease on books

Answer 4

Dr. Right-of-use Asset
Cr. Lease liability

1. Multiply minimum lease payment by present value factor of annuity

Question 5

Lessee amortization table for leases

Answer 5

Date - Lease Payment - Interest - Reduction - Lease Liability

Question 6

Lessee Journal entries for operating lease - wiley

Answer 6

Recording Asset
Dr. ROU Asset
Cr. Lease Liability

For Payment
Dr. Lease Liability
Cr. Cash

For Interest
Dr. Lease expense - Payment amount
Cr. Right of use asset - Reduction
Cr. Lease liability - interest

Question 7

Lessor Journal entries for operating lease with payment at the beginning of the year

Answer 7

For payment
Dr. Cash
Cr. Unearned Revenue
Dr. Unearned Revenue 
Cr. Lease Revenue 

Depreciation
Dr. Depreciation expense
Cr. Accumulated depreciation

Question 8

Finance Lease Criteria

Answer 8

1. Title is transferred to lessee
2. Lessee has option to buy asset at a bargain
3. Lease term is 75% or more of useful life of asset
4. Present value of minimum lease payments 90% or more of FV of asset
5. Asset has no alternative use

Question 9

Residual Value - guaranteed

Answer 9

If there is guaranteed residual value that means the lessee is responsible for the condition of asset at the end of the lease. This usually means its an operating lease the lessee is responsible for the guaranteed amount

Question 10

Residual value - unguaranteed

Answer 10

If there is unguaranteed residual value then lessee is not responsible for condition of asset. This is like salvage value for the lessor.

Question 11

How to calculate what lessee has to pay for finance lease

Answer 11

1. Subtract present value of residual value from FV of asset

2. Divide 1 by present value factor of annuity

Question 12

How lessee calculates present value of minimum lease payments

Answer 12

1. Multiply lease payment by present value factor
2. Find the difference between guaranteed residual value and expected residual value multiply by present value factor
3. Add 1 & 2 to find what you capitalize as lease liability

Question 13

Finance lease journal entries for lessee

Answer 13

Recording asset
Dr. Right of use asset
Cr. Lease liability

Interest
Dr. Interest Expense - what asset was recorded at X rate
Dr. Lease liability - reduction
Cr. Cash - payment amount

Depreciation
Dr. Amortization expense
Cr. Right of use asset

Question 14

Lessor initial journal entries for sales type lease and calculation

Answer 14

1. Divide FV of asset by PV factor for annuity to find payments
2. Multiply payments by number or years in lease

Journal entries at inception of lease
Dr. Lease receivable - total payments
Cr, Unearned Interest - Difference between payments & FV
Cr. Sales revenue - FV of asset

Dr. COGS - BV of asset
Cr. Equipment

Dr. Cash - single payment amount
Cr. Lease receivable

Question 15

Sales type lease journal entries and table for lessor

Answer 15

Dr. Unearned Interest
Cr. Interest Revenue

Lease payment - interest - Reduction - Net lease Receivable(FV)

Question 16

Note about how to depreciate finance leases

Answer 16

• If it meats the transfer of ownership criteria or purchase option criteria then you depreciate over the life of the asset but if there isn’t one then you depreciate over the life of the lease

Question 17

What is a direct financing lease

Answer 17

When the lease doesn’t meet any of the 5 criteria of a sales type lease(financing lease) but residual value is guaranteed by a 3rd party

Question 18

Journal entry for lessor at the inception of a direct financing lease

Answer 18

Dr. Lease receivable - FV of asset
Cr. Deferred gross profit - difference between FV & BV
Cr. Inventory - cost of asset

Question 19

Journal entry for recognition of lease revenue for a direct financing lease

Answer 19

Dr. Cash - lease payments
Dr. Deferred gross profit - difference between interest rate on FV & BV
Cr. Lease revenue - interest rate based on effective rate on BV
Cr. Lease receivable - reduction based on implicit rate FV

Question 20

Direct financing lease - which rate for which value

Answer 20

1. FV gets the implicit rate

2. BV gets the effective rate

Question 21

When can you recognize a gain for a sale-leaseback

Answer 21

If its operating then you recognize a gain because lessor keeps the asset but with a finance lease its with the lessee

Question 22

Lessee Journal entries for operating lease - Becker

Answer 22

At Inception
Dr. Right of use asset
Cr. Lease liability

Payment
Dr. Lease expense - payment amount
Cr. Cash
Dr. Lease liability - reduction
Cr. ROU asset depreciation

Question 23

Lessor Journal entries for operating lease - Becker

Answer 23

At Inception
Dr. Lease Receivable
Cr. Unearned lease rental income

Payment
Dr. Cash
Cr. Lease receivable
Dr. Unearned lease rental income
Cr. Lease Income

Depreciation
Dr. Depreciation expense
Cr. Accumulated depreciation

Question 24

How to calculate finance liability for sales leaseback

Answer 24

Difference between FV and CV

Dr. Cash
Dr. A/D
Dr. Loss"
Cr. Equipment
Cr. Finance liability*
Cr. Gain"