Present Value Leases Flashcards
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Started on 17 August 2014 @ 7.30 AM
Total questions 61
To do at a time 30
Practice session 78 or 79
Calculation of depreciation.
Value the lease at present value, divide by lesser of useful life or lease period.
For capital lease IFRS
US GAAP uses the term “capital lease,” whereas IFRS uses the term “finance lease.”
Does IFRS use the term “sales-type lease.”
No
Finance lease IFRS
IFRS requires a lease to be classified as a finance lease if substantially all the risks or benefits of ownership have been transferred to the lessee. Because the lease contains a bargain purchase option and the lease is for the entire life of the asset, all the risks and benefits have been transferred. Therefore, the lease meets the criteria for a finance lease.
What is the cost basis of an asset acquired by a lease which is accounted for as a capital lease?
The present value of the minimum lease payments under the lease (exclusive of executory costs and any profit thereon) discounted at an appropriate rate.
When a lease is accounted for as a capital lease, lessees record the lease by debiting the asset and crediting a liability for the present value of the future minimum lease payments
What are the three types of period costs that a lessee experiences with capital leases?
Interest expense, amortization expense, executory costs.
The three costs incurred by a lessee with respect to capital leases are interest expense, amortization expense, and executory costs. Each payment consists of principal reduction and interest expense. The amount capitalized must be amortized over the useful life of the asset. Executory costs, such as insurance, maintenance, etc., are borne by the lessee. The basic premise in capital leases is the risks and responsibilities of ownership are transferred from lessor to lessee.
Rent received in advance by the lessor for an operating lease should be recognized as revenue
In the period specified by the lease.
Under an operating lease rental revenue is to be recognized in each accounting period on a straight-line basis unless another systematic and rational basis is more representative of the decline in the asset’s service potential.
Rules for depreciation.
The lessee records the asset at the lower of (1) the present value of the minimum lease payments or (2) the fair market value of the leased asset. In this case, the present value ($258,000) is less than the fair market value ($280,000); therefore, $258,000 is capitalized. Since the machine reverts to the lessor at the end of the lease, the lessee should depreciate it over the lease term (8 years) even though it is less than the useful life (10 years). Depreciation expense is $32,250 ($258,000/8 years).
Depreciation when lessee own the property.
Additionally, the cost of the equipment is depreciated over the life of the asset rather than the life of the lease since title automatically passes to the lessee at the end of 10 years and the lessee will own the asset. Depreciation expense, $13,420, is the cost of the equipment depreciated over 15 years ($201,302/15 years).
Sale lease back three types of degree of rights what are those?
- Substantially all
- Minor
- More than minor but less than substantially all
From capital lease to operating lease, would be treated as what?
sale lease back.
The lessee’s net carrying value of an asset arising from the capitalization of a lease would be periodically reduced by the
Depreciation/amortization of the asset.
When should a lessor recognize income a nonrefundable lease bonus paid by a lessee on signing an operating lease?
Over the life of the lease.
Case 1 occurs when the PV of the lease payments 10% or less of the FV of the sale-leaseback property.
No deferred revenue.
