Lessee accounting Flashcards
List the 5 criteria assed on a lease to determine if a lease is classified as a finance lease?
- Transfer title of ownership
- Bargain purchase option that the lease is reasonably certain to exercise.
- The lease terms is 75% or more of the economic life of the leased property.
- The PV of the minimum lease payments is 90% or more of the Fair value of the asset.
- The assets is of such of specialized nature that there is no alternative use for the lessor.
When will a lease begin to be recorded on the balance sheet?
The lessee should recognize the lease at the commencement date, when the asset is available to the lessee for use.
What are the additional components added to the lease to determine the lease liability at PV?
- Residual value guarantee by the lessee
- Purchase option if the lessee is reasonably certain to exercise
What term should be used to amortize leasehold improvements?
The lesser of the term lease or the economic useful life term of the asset.
What are the additional components added to determine the ROA?
- Residual value
- Purchase option
- Initial direct cost
On a lease what is the rate that should be used to calculate interest expense and determine the PV factor
- The implicit rate on the lease and if it is not specified than the incremental borrowing rate of the lessee.
What are the indicators to asses if ROA should be depreciated using the assets useful life?
- There is transfer of ownership or
- There is a purchase options that is reasonably certain the lessee will exercise.
In a finance lease what is the subsequent JE to recognize the lease payment, interest expense, amortization of the lease liability and the amortization of the ROU.
A) Recording the payment, interest expense and and amortization of the lease liability
DR. Interest expense XXXX
DR. Lease liability XXXX
CR. Cash XXXX
B) Recording ROA amortization
DR. Amortization expense
CR. Accumulated ROU
In a operating lease what is the subsequent JE to recognize the lease payment, amortization of the lease liability and the amortization of the ROU.
A) The lease expense is the same amount as cash paid. Lease liability and Accum ROA represent the difference between the payment and interest expense.
DR. Lease expense XXXX
DR. Lease liability XXXX
CR. Cash XXXXX
CR. Accumulated ROA XXXXXX
What are the indicators to asses if ROA should be depreciated using the lease term?
- Present value of minimum lease payment is greater than 90%
- The asset is of specialized nature that can not be sold to another third party for it use.
What are the indicators to asses if ROA should be depreciated using the shorter of the lease term or useful life?
- Present value of the minimum lease payment exceed 90%.
- Asset will be used over 75% of its useful life.
- Asset is of specialized nature that it has no alternative use.
