Lessee Accounting

Question 1

What are the criteria to classify the lease as a sales-type by the lessor and finance lease by the lessee?

Answer 1

1) O- Ownership of the asset transfers from the lessor to the lessee at the end of the lease term
2) W- The lessee has the written option to purchase the underlying asset; the option is one that the lessee will reasonably be certain to exercise
3) N- The net present value of all lease payments and any guaranteed residual value equals or exceeds substantially all of the underlying asset’s fair value
4) E- The term of the lease represents the major part of the economic life remaining for the underlying asset.
5) S- The asset is specialized by nature and does not have an alternative use to the lessor when the lease term ends.

Question 2

How is the amortization expense for the finance lease calculated?

Answer 2

The annual lease payment minus the interest on the liability, which is calculated by the PV of the lease payments multiplied by the implicit rate.