Section 3...Leases

Question 1

Financing Lease criteria

Answer 1

1. Lease transfers ownership to lessee during lease term
2. Contains a bargain purchase option
3. Lease term is 75% or more of economic useful life of property.
4. P.V. of min lease payment equals 90% or more of FV of leased property.
5. Leased asset does not have alternate use.

**ONLY one of the criteria needs to be met to qualify as a financing lease.

Question 2

Financing lease basis

Answer 2

Lower of F.V. of P.V. of lease payments

**Remember to consider timing, i.e. down payments and interest. These affect balances at end of periods.

**Original lease liability amount when accounting for P.V. is the annual payments x’s LOWER OF incremental borrowing rate or implicit interest rate.

Question 3

Sales type lease

Answer 3

Profit recognized is P.V. of lease payments OR Sales amount less carrying cost.

Unearned interest is Total Lease payments less P.V. of lease payments.

Question 4

Direct financing lease

Answer 4

Residual value is guaranteed by a third-party.

To determine revenue, take Net Lease Receivable (or carrying amount) x’s Interest Rate to amortize the net lease receivable to $0.

To determine annual lease payments, take (F.V. of lease less P.V. of (single sum) of Residual Value) divided by P.V. annuity factor.

Question 5

Lease Income

Answer 5

*If there’s a finder’s fee, since it benefits the entire term of the lease, it needs to be depreciated instead of recognized in full.