Lecture 18

Question 1

lease

Answer 1

contract where owner grants use of property to second party in exchange for regular rental payments

Question 2

capital (finance leases)

Answer 2

transfers most risks & benefits of ownership to lessee

property accounted for as an asset & obligation to pay as liability

Question 3

operating leases

Answer 3

not recognized as liabilities on B/S

accounted for by the lessee as ordinary rent exp

Question 4

criteria for capital lease

Answer 4

ANY 1

1. ownership of asset transferred @ end of lease term
2. bargain purchase option - lessee can purchase for significantly less than est. fair market value on exercise date of the option
3. lease term is 75% OR MORE of est useful life
4. PV of minimum lease payments is 90% OR MORE of estimated fair market value

Question 5

journal entry for operating lease

Answer 5

rent exp

     cash

Question 6

journal entry for capital lease

Answer 6

leased asset

       capital lease liab, current
       capital leas liab, LT

Question 7

current portion =

Answer 7

1st year’s payment - 1st year’s interest

Question 8

leased asset amount =

Answer 8

PV of payments

Question 9

for capital leases, expense ___ over the life of the lease

Answer 9

decreases

Question 10

for operating leases, expense ___ over the life of the lease

Answer 10

is constant

Question 11

capital leases are treated as ___ and appear on the ___ ___

Answer 11

debt

balance sheet

Question 12

operating leases are ___ and _________-

Answer 12

expensed

do not appear on balance sheet

Question 13

for a conservative view of financial position, incorporate…

Answer 13

the effect of operating leases as debt (capitalize the operating leases)

Question 14

2 ways to capitalize operating leases

Answer 14

1. discount back operating lease obligations at company’s cost of debt
2. take most recent year and multiply by 8

look for RENT or RENT EXP or LEASES

Question 15

hard way of capitalizing operating leases

Answer 15

1. calculate PV of minimum operating lease payments as of current period

make assumptions about firm’s discount rate (based on rate applied to capitalized leases)

make assumptions about payments after year t+5 (ex. all of lump sum payments are made in year 6)

Question 16

NBV =

Answer 16

Gross BV - Accum Depr

Question 17

interest rate =

Answer 17

(next year’s int exp) / (today’s PV of liability)

Question 18

next year’s interest expense =

Answer 18

next year’s total payment - next year’s payment towards principal

Question 19

reduction in lease liability =

Answer 19

cash for capital lease payment - interest exp

Question 20

capital leas liability @ end of the year =

Answer 20

capital lease @ beg of year - reduction in lease liab

Question 21

journal entry for reclassifying lease obligation

Answer 21

capital lease liab, LT

     cap lease liab, current

Question 22

journal entry for lease payment

Answer 22

int exp
cap lease liab, current

       cash

Question 23

journal entry for depreciation of leased asset

Answer 23

amortization exp - leased asset

       accum amort of leased asset

Question 24

balance in lease obligation =

Answer 24

BB + int payment - lease payment