Lesson 14 Flashcards
What is a finance lease?
Where the lease is in substance a sales.
What are the 5 criteria a finance lease has one or more of?
- Title transferred to the lessee
- Lessee has the option to buy it at the end of the lease.
- Lease term is 75% or more of its useful life
- Present value of lease payments is equal to or greater then the fair value of the asset at inception (90% rule)
- The leased asset is specialized in nature and has no alternative use
Why do the lessee and lessor use the same criteria to determine classification of the lease? (Finance or operating)
The reason is that the tests are used to determine whether the lessee and the lessor have an agreement to transfer control of the asset from one party to the other. If the lessee receives control, then the lessor must have given up control.
What is a sales-type lease (finance)?
When the lessee takes ownership or consumes a substantial portion of the underlying asset over the lease term.
Lease Receivable formula?
Present value of rental payments + present value of guaranteed and unguaranteed residual values = lease receivables.
A lessee had a ten-year finance lease requiring equal annual payments. What should the reduction of the lease liability in year 2 be equal to ?
The current liability shown for the lease at the end of year 1.
Which of the following is a correct statement of one of the classification tests?
The lease term is equal to or more than 75% of the estimated economic life of the leased property.
What is included in the present value for the lease receivable amount ?
Rental payments plus the present value of guaranteed and unguaranteed residual values.
In computing amortization of a leased asset where there is no bargain purchase option, what should the lessee subtract?
No residual value and depreciate over the term of the lease.
What is the amount to be recorded as the cost of an asset under a finance lease is equal to?
Present value of the lease payments.
