Present Value 13E - Leases

Question 1

What are the standard journal entries for an operating lease?

Answer 1

Lessee:
Rent Exp DR
Cash CR

Lessor:
Cash DR
Rent Income CR

Question 2

What are the journal entries for the Lessee/Lessor when having to SL because of consideration?

Answer 2

Lessee:
During Free Period:
Rent Exp $900
AP $900

When Payments begin:
Rent Exp $900
AP $100
Cash $1,000

Lessor:
Durring Free Period:
Rent Rec $900
Revenue $900

When Payments begin:
Cash $1,000
Revenue $900
Rent Rec $100

Question 3

Lessee must meet one of the following conditions to capitalize a lease:

Answer 3

1. Ownership transfers at end of lease
2. Written option for bargain purchase (so good that it is to good to refuse - 50% of FV)
3. 90% of leased property FMV (right now) < Present Value of future lease payments (PV of Lease Payments/FV)
4. 75% of asset economic life is being committed in lease term - (Lease Term/Life)

Question 4

What amount does a lessee capitalize of the lease?

Answer 4

The PV of future lease payments (excludes the executory costs for R&M, insurance, tax, ect) +

1. Ownership - Required PV Buyout
2. Written - PV Bargain Buyout
3. Ninety % - Nothing
4. 75 % - Nothing

Question 5

What rate is used to figure the PV of future lease payments?

Answer 5

The lesser of:

1. Rate implicit in the lease (if known)
2. Rate available in the market (to lessee)

Question 6

Over what life does the lessee depreciate a capital asset?

Answer 6

1. Ownership - Asset Life
2. Written - Asset Life
3. 90% - Lease Life
4. 75% - Lease Life

Question 7

What must be disclosed regarding capital leases?

Answer 7

1. Each amount for each year for the next 5 years and the aggregate (total) amount after that

Question 8

The lessor must meet all three of the following criteria to de-capitalize:

Answer 8

1. Lessee meets one of 4 conditions to capitalize
2. Uncertainties do not exist regarding any unreimbursable costs to be incurred by the Lessor
3. Collectibility of th elease payments is reaonably predictable

Question 9

What are the two types of capital leases available?

Answer 9

1. Direct Financing

2. Sales Type

Question 10

What are the differences between the Direct Financing Lease & Sales Type Lease?

Answer 10

1. Sales Type - BV does not equal FV
   Gain/Loss will be recorded along with interest income
2. Direct Financing - BV equals FV
   Only interest income will be recorded

Question 11

What is a sale leaseback?

Answer 11

Property sold by the owner and then leased right by by the previous owner

Question 12

What are the two type of sale leasebacks?

Answer 12

1. Minor - PV of Future Lease Payments is less than 10% of FMV of property just sold
2. Major - PV of Future Lease Payments is more than 10% of the FMV of property just sold

Question 13

Minor lease(back) is considered?

Answer 13

Not a sole leaseback

Question 14

Major Lease(back) is considered?

Answer 14

A Sale Leaseback

Question 15

No Sale Leaseback is recorded how?

Answer 15

Gain/Loss on Sale

1. Recognize entire loss in year of sale
2. Record rent expense for each payment

Question 16

Sale Leaseback is recored how?

Answer 16

Loss on Sale:
Recognize entire loss in year of sale

Gain on Sale
Defer Gain (up to PV of lease liability)
Amortize gain as offset (reduction)
1. Operating Leaseback - Amortize the deferred gain on sale as an offset to the rent expense to be paid in the future
2. Capital Leaseback - Amortize the deferred gain on the sale as offset to depreciation expense on the captialized asset that original owner/seller “Owns” again

Question 17

Difference between US Gaap & IFRS:

Answer 17

75% in US GAAP is “Major Part” in IFRS

90% in US GAAP is “Substantially All” in IFRS