chapter 15 Leases

lesse

_____ entries are not affect whether the lessor has a profit or not

finance lease

_____ the lessee reports interest and amortization expenses separately in the income statement

lease

a contractual arrangement by which the lessor (owner) provides the lessee (user) the right to use an asset for a specified period of time

1. agreement specifies ownership of asset transfer to the lessee 2. agreement contains a purchase option that the lessee is reasonable certain to exercise (bargain purchase option) 3. the present value of the lease pmts equal or exceed substantially all of the fair value of the underlying asset 4. the lease term is for the major part of the remaining economic life of the underlying asset 5. the asset is of such specialized nature that it is expected to have no alternative use to the lessor at the time of the end of the lease term

a finance or sales lease must meet one or more of the these 5 criteria

purchase option

a provision of some lease contracts that gives the lessee the option of purchasing the leased property during, or at the end of, the lease term at a specified price.

choose expenses

a short term lease permits the lessee to _____ not to record an asset and liability associated with the lease at the beginning of the term instead the lessee records lease pmts as rent ___ over the lease term

beginning

all lessor entries are the same as a selling lease with or with out profit except the ___ entry

residual value

an estimate of what its commercial value will be at the end of the lease term can include a guarantee by lessee that the lessor will recover specified residual value at end of the lease when custody revert back to lessor

uncertain lease terms

contractual lease term is adjusted for any periods cover by options to extend or terminate the lease for which exercise is deemed reasonably certain

Operating Leases

doesn't meet any criteria for a finance/sales lease fundamental rights of ownership retained by lessor sales is not recorded by lessor lessor records revenue on straight line basis lease payable is a non debt liability lessee records lease payable and right of use asset at commencement based on present value of lease payments

finance lease

economically similar to purchase bc of terms of lease allows the lessee to direct use of the asset in a way the lessee receives substantially all of the remaining benefits from the asset and creates obligations for lessee similar to those that financing the purchase of the asset would impose

Non lease components

examples service contracts maintence property taxes hazard insurance included in period lease payments to be paid to the lessor indirectly paid by the lessee and expensed by the lessee lessee records the right of use asset and the lease lability for the present value of lease pmts excluding non lease components

sales type lease with selling profit

exists when fair value of asset (PV of lease pmts) exceeds the cost or carrying value of asset sold lessor recognizes a selling profit on "sale" of asset in addition to interest revenue earned over lease terms

1. lease is classified as finance/sales type 2. both lease and lessor consider the exercise price of the option to an additional cash payment 3 assume the lease term ends on date the option is expected to excercised

if the exercise of a purchase option is reasonably certain what 3 ways does the accounting for the lease change

when significant event or change in circumstances indicates a change in economic incentive for extension of termination of lease

lease terms are only reassessed when...

operating lease

lesee will have two lease related expenses interest and amortization expense the two accounts are combined for lease in to a single lease expense and reports a single amount each year on income statement the lessor has only one single lease revenue account and reports that straight line amount each year on its income statement

lessor

owner of a leased asset

substantially all of fair value

pmts with present value of 90% or more of fair value represent substanially all of the fair value

purchase option

provision that gives lessee option to purchase the leased propter at a specified exercise price

revenue - cogs

selling profit

1 has lease term (including options to renew extend) of 12 months or less and 2.) doesnt contain a purchase option, the lessee is reasonably certain to exercise that would extend the term beyond 12 months

short term lease is considered short term if it meets two criterias

1 reduces risk for lessor 2 provides an incentive for lessee to exercise care in maintaining the asset

the two benefits of residual value

lessee

user of a leased asset

if the exercise price is sufficiently lower than the expected fair value of the property when option becomes exercisable and the lease appears reasonably certain to exercise purchase option at beginning of the lease

when is a purchase option met

major part of economic life

when most of the risks and rewards are deemed to have been transferred to the lessee 75% or more of remaining life