Module 13e

Question 1

What are the 4 parts you must identify for any lease arrangements?

Answer 1

1) Who is the Lessor and Lessee. 2) What is the date in which the lease begins. 3) What is the type of the lease. 4) What is the time period

Question 2

How are prepayment for future expenses classified?

Answer 2

They are an asset on the balance sheet and amortized using the straight-line method.

Question 3

If a lease is given free rent for a few periods. The Lessee and lessor must take the total rent expense to be paid and divide it evenly over each period. What are the JE’s

Answer 3

In free periods. Dr. Expense. Cr. Payable. In paying periods. Dr. Expense. Dr. Payable. Cr. Cash

Question 4

In an operating lease, where is the asset being recorded and depreciated?

Answer 4

On the Lessor’s books

Question 5

Where are prepayments classified for the lessor?

Answer 5

They should be set-up as a deferred credit (liability)

Question 6

What is the criteria for the Lessee has to meet to be able to capatilize the lease? (must only meet 1)

Answer 6

OWNS - Ownership transfers at the end. Written option for Bargain purchase. Ninty percent of leased property FMV < PV of future payments. Seventy-five percent of asset economic life is being committed in lease term.

Question 7

How do you calculate for Ninty percent of leased property FMV < PV of future payments?

Answer 7

IF (PV of lease payments / Fair value) greater than or equial to 90%

Question 8

How do you calculate the Economic life test

Answer 8

IF (Lease Term / Life) is greater than or equal to 75% of assets estimated life

Question 9

To calculate the PV of future lease payments. What rate does the lessee use.

Answer 9

The Lessor (Lower Rate) of the rate implcit in the lease to its own incremental borrowing rate.

Question 10

What dollar amount is capatalized.

Answer 10

Depends on which test you pass. If it is the Ownership or Written bargain purchase. You would use the PV of payments and buyout. IF you were to pass the 90% or 75% just the PV of payments

Question 11

What is the depreciation period in a capitalized lease?

Answer 11

Depends on which test you pass. If it is the Ownership or Written bargain purchase. It is over the assets life. If is the 90 or 75 test. It is the lease life.

Question 12

What is the Present Value Formula

Answer 12

PV= Annuity * Factor

Question 13

What is the footnote disclosure for capital leases?

Answer 13

5 years worth of lease amounts. Aggregate the period after

Question 14

What is the criteria for a Lessor to have a Capital Lease?

Answer 14

1 condition from the lessee’s criteria AND - LUC - Lessee Owns the leased property. Uncertainties do not exist regarding any unreimburseable costs to be incurred. Collectability of lease payments is resonably predictable

Question 15

What is the criteria that must be meet to have a direct financing or sales type lease?

Answer 15

You must match 1 categorie from the Lessee. And you must match the U, or C portion of the Lessor criteria

Question 16

What is the criteria to have a direct financing lease?

Answer 16

Book Value = Fair value

Question 17

What is the criteria to have a sales type Lease?

Answer 17

book value does not equal fair value

Question 18

What is the JE for a sales type lease?

Answer 18

Dr. Lease Receiabable. Cr. Sales AND Dr. COGS Cr. Asset

Question 19

The profit on a sales type lease that a lessor gets to recognize immediately is?

Answer 19

the pv of lease payments - carrying cost on books. If the Pv of lease payments is not known, use selling price

Question 20

What is the JE for a direct financing lease?

Answer 20

Dr. Lease receivable. Cr. Asset

Question 21

What is the only source of revenue for a direct financing lease?

Answer 21

The only income is interest income

Question 22

What is a sale leaseback?

Answer 22

Property is sold by the owner and immediately leased (operating or capital) back again, with the orignial owner/seller never giving up possession or use of the property

Question 23

What are the two criteria for a sale leaseback

Answer 23

minor, and major

Question 24

What is the criteria for a minor sale

Answer 24

if the PV of the future lease payments is less than 10% of the FMV of property just sold (selling price)

Question 25

What is the criteria for a major sale

Answer 25

IF the pv of t he future lease payments is more than 10% of the FMV of the property just sold

Question 26

What is a No sale leaseback?

Answer 26

A minor sale less than 10% FMV

Question 27

How do you recognize a gain/loss on a No sale Leaseback?

Answer 27

Recognize entiere gain/loss in year of sale. Record rent expense going forward

Question 28

What is a Sale Leaseback?

Answer 28

when the lease is MAJOR - more than 10% FMV

Question 29

How do you recognize loss on a sale leaseback?

Answer 29

You Recognize entire loss in year of sale

Question 30

How do you recognize gain on sale leaseback?

Answer 30

You defer the gain (up to PV of lease liability) and amoritize gain as an offset to either rent expense, or depreciation)

Question 31

IFRS is more principles based than GAAP

Answer 31

Example GAAP uses 75% IFRS says Major part. Gaap uses 90%, IFRS says Susbstantially ALL