M2 - Capital Leases Flashcards
What is the formula to calculate PV or FV of the equipment on a capital lease?
PV = annual rents x annuity due PV factor
Guaranteed residual value is, in effect, an additional lease payment and must be included in the calculation of the PV of the minimum lease payments. (true or false)
True
Capital leases are valued at PV rather than FV
The lesser of the lessee’s incremental borrowing rate or the lessor’s implicit rate (if known) should be used. (true or false)
True
True or False: In a sales-type (finance) lease, any difference between the FV of the leased asset and its carrying value is recognized as manufacturer’s or dealer’s profit.
True
If they give you PV of the lease payments at an imputed interest rate, use that figure and subtract the carrying cost on the lessors books.
Unearned interest revenue in a sales-type lease is amortized over the period of the lease using the _______ method
Interest
When a lease is capitalized because of transfer of title or bargain purchase, depreciation is based on (the life of the asset or the lease)?
The life of the asset, not the lease. The cost includes the bargain purchase price.
Depreciation cannot be taken below the salvage value.
For the lessee, the lease must meet just one of the four conditions to capitalize.
Ownership transfers at the end of the lease.
Written option for bargain purchase
Ninety Percent rule: The PV of the lease payments is > 90% of the FV of the leased property.
Seventy Five Percent Rule: The Lease term is > 75% of the assets economic life.
OWNS
True or False: The lessee records the lease as an asset and a liability at the lower (lesser) of the FMV of the asset at the inception of the lease, or cost (PV of the minimum lease payments).
True
Lease should be depreciated (amortized) over the lease term if the lessee does not take ownership of the asset by the end of the lease or if there is not a bargain purchase option.
True or False: If the PV of the minimum lease payments amounts to 88% of the FV of the asset, the lease would be classified as an operating lease under US GAAP and would most likely be classified as a finance lease under IFRS. Under IFRS, a lease is classified as a finance lease if the PV of the minimum lease payments amounts to at least substantially all of the FV of the leased asset. An argument could be made that 88% is “at least substantially all of the FV of the asset”
True
Under IFRS, initial direct costs must be (added or subtracted) to the finance lease asset at lease inception?
Added
Th lease would be recorded using the following JE:
DR: Finance Lease Asset
CR: Finance Lease Obligation
CR: Cash (initial direct cost)
The finance lease would then be amortized over the lease term/useful life.
If the question asks for the asset balance, it is important to remember that the only transaction that reduces the asset value is depreciation.
The lessee will capitalize the lease (due to the transfer of title) and will incur both depreciation and interest expense. The lessor will earn and book interest income when the payments from the lessee are received. (true or false)
True
The lessor will remove the asset from its book at the inception of the lease and will not depreciate the asset.
Lessors recording a lease receivable for a direct-financing lease should include the minimum lease payments PLUS any residual value. (true or false)
True, the reason for this is because the lessor can also expect to collect this residual value from the lessee at the culmination of the lease.
Executory costs, like insurance, taxes, and maintenance, are always recorded separately and do not affect the computation of the minimum lease payments nor the lease receivable.
If a lease includes a bargain purchase option, it would be depreciated over what?
Its useful life of the equipment instead of the lease term.
If a question gives you the FV of the equipment going to be leased as well as the PV of the lease payments and the PV of the purchase option, would you take the lesser of the FV of the equipment to the PV of the lease payments only?
No, You would add the PV of both the lease payments and the purchase option and take the lesser of that or the FV of the equipment.
True or False: For a capital (finance) lease, the minimum lease payment is allocated between principal and interest rate inherent in the lease. The portion allocated to principal reduces the remaining capital lease liability. The process is similar to a home mortgage.
True
