Lessee accounting

Question 1

List the 5 criteria assed on a lease to determine if a lease is classified as a finance lease?

Answer 1

1. Transfer title of ownership
2. Bargain purchase option that the lease is reasonably certain to exercise.
3. The lease terms is 75% or more of the economic life of the leased property.
4. The PV of the minimum lease payments is 90% or more of the Fair value of the asset.
5. The assets is of such of specialized nature that there is no alternative use for the lessor.

Question 2

What date should be used to recognize a lease on the balance sheet at PV?

Answer 2

The lessee should recognize the lease at the commencement date, when the asset is available to the lessee for use.

Question 3

What are the additional components added to the lease to determine the lease liability at PV?

Answer 3

1. Residual value guarantee by the lessee
2. Purchase option if the lessee is reasonably certain to exercise

Question 4

What term should be used to amortize leasehold improvements?

Answer 4

The lesser of the term lease or the economic useful life term of the asset.

Question 5

What are the additional components added to determine the ROA?

Answer 5

1. Residual value
2. Purchase option
3. Initial direct cost

Question 6

What rate should be used to calculate interest expense and determine the PV factor

Answer 6

1. The implicit rate on the lease and if it is not specified than the incremental borrowing rate of the lessee.

Question 7

What are the indicators to asses if ROA should be depreciated using the useful life of the asset?

Answer 7

1. There is transfer of ownership or
2. There is a purchase options that is reasonably certain the lessee will exercise
3. The term of the lease is greater than 75% of the useful life of the asset.