CPA FAR - Leases

Describe the general computation of a lease payment when an asset with an estimated residual value reverts to lessor?

(Fair value of asset under lease - present value of residual)/(present value factor for lease payment)

List the items included in a lease liability balance for lessee.

1. Annual lease payments; 2. Bargain purchase option; 3. Lessee guarantee of residual.

List the items included in a lease receivable balance for the lessor.

1. Annual lease payments; 2. Bargain purchase option; 3. Unguaranteed residual; 4. Lessee guarantee of residual; 5. Third party guarantee of residual.

List the two classifications of capital leases for the lessor.

1. Direct Financing; 2. Sales-Type.

What must a lessee disclose for financial reporting purposes?

1. Gross amount of assets recorded under capital leases; 2. Future minimum lease payments in the aggregate, and for each of the five succeeding years; 3. Future minimum rentals in the aggregate, and for each of the five succeeding years.

Describe the exceptions to the general rule of deferring gains on sale-leaseback transactions.

1. Seller/lessee retains a minor portion of the use of the asset; 2. Seller/lessee does not retain all use of an asset.

What must a lessor disclose for financial reporting purposes?

1. The components of the net lease receivable including future minimum lease payments to be received, unguaranteed residual values, and unearned interest revenue; 2. Minimum future rentals on noncancelable operating leases in the aggregate and for each of the five succeeding fiscal years.

Define "capital lease".

A lease that transfers the risks and rewards of ownership to the lessee.

Define "bargain purchase option (BOP)".

An option whereby the lessee has the opportunity to purchase the asset at an amount that is significantly less than the asset's fair market value on that future date.

List the international lease capitalization criterion involving magnitude of present value of lease payments

Capitalize if the present value of lease payments is substantially all of the asset's fair value.

List the international lease capitalization criterion involving length of lease term.

Capitalize if the term is for a major portion of the asset's life.

How are the initial direct costs for operating leases accounted for?

Capitalize the initial direct costs and amortize to expense over the term of the lease in proportion to revenue recognized.

Define "executory costs".

Costs for insurance, maintenance, and taxes.

How is depreciation recorded by the lessor in an operating lease?

Depreciates asset over economic life.

What amount is the lease payment based on for a simple sales-type lease?

Fair value of asset leased.

What is the amount on which a lease payment is based for a simple direct financing lease (DFL)?

Fair value of asset leased.

What gross margin should be reported for a sales-type lease with an unguaranteed residual?

Fair value of asset less book value of asset.

What amount should be recorded for sales for a sales-type lease with an unguaranteed residual?

Fair value of asset less present value of unguaranteed residual.

List the amount on which interest expense is based (for first payment, assume ordinary annuity).

Fair value of asset.

List the two ways to compute net lease receivable under the gross method.

Gross lease receivable less unearned interest, and present value of remaining lease payments.

In what period is sales revenue for a sales-type lease recognized?

Immediate recognition of full sales amount (fair value of asset).

What is the effect of a sales-type lease on a lessor's pretax income over the lease term?

Increase by total interest (sum of lease payments less fair value of asset) + gross profit (fair value of asset less book value of asset).

What income is derived from a sales-type lease for the lessor?

Interest income and gross profit.

What amount of revenue is recognized by the lessor on a direct financing lease (DFL)?

Interest only: sum of lease payments less fair value of asset.

What rate is the lessor required to use to calculate the present value in a capital lease?

Interest rate implicit in the lease.

To which party does a direct financing lease or sales-type lease distinction make a difference on accounting for the lease?

It makes a difference for the Lessor.

What period of depreciation is there an unguaranteed residual?

Lease term.

How is depreciation recorded by the lessee in an operating lease?

Lessee has no asset to depreciate.

How is a lessor's minimum lease payments calculated?

Lessee minimum lease payments + any residual value guaranteed by a third party.

What rate is the lessee required to use to calculate the present value in a capital lease?

Lower of implicit rate or incremental borrowing rate.

List the criteria for a lessee to classify a lease as a capital lease.

Meet one of the following 1. Lease transfers ownership; 2. Lease contains a bargain purchase option; 3. Lease term is 75% or more of useful life; 4. PV is 90% or more of market value.

List the criteria for a lessor to capitalize a lease.

Must meet one of the four lessee criteria, plus 1. There are no important unreimbursable cost uncertainties yet to be incurred by the lessor; 2. Collectability of the minimum lease payments is reasonably assured.

How is depreciation recorded by the lessor in a capital lease?

No asset on books to depreciate.

Is an unguaranteed residual included in the minimum lease payments of both parties?

No, it is not included for either party.

Is an unguaranteed residual included in the capitalized lease accounts for both parties?

No, it is only included in the lessor's account.

Is a third party guarantee of residual included in the minimum lease payments of both parties?

No, only in the lessor's payments.

List the capitalization criteria applicable for a lease of land.

Only title transfer and Bargain Purchase Option (BPO).

How are executory costs included in the lease payment accounted for?

Parties to the lease subtract the executory costs before capitalizing the remaining lease payment; executory costs are expensed by lessee.

List the two ways of computing the current portion of a lease liability.

Present value of next payment; change in total lease liability for the year following the balance sheet date.

How are the initial direct costs for sales-type capital leases accounted for?

Recognize the initial direct costs immediately as a selling expense.

What is the accounting treatment of contingent rentals?

Record as revenue (lessor) or expense (lessee) in period of occurrence.

How is a lease of land and building with Bargain Purchase Option (BPO) accounted for?

Record separate capital leases based on fair value; land lease is not depreciated.

How is lease of land and building without title transfer or Bargain Purchase Option (BPO) when fair value of land is less than 25% of total fair value accounted for?

Record single lease.

What effect does a Bargain Purchase Option (BPO) and residual value at the end of a lease term have on computation of lease payment?

Reduces the payment because BPO and residual values provide value to lessor.

What is the period of depreciation of an asset that is leased when there is a bargain purchase option?

Remaining useful life of asset at inception.

How is a lessee's minimum lease payment calculated?

Rental payments + Bargain Purchase Option + Lessee Guarantee of Residual Value.

What is the initial recorded amount for a lease receivable under the gross method for a lease with bargain purchase option (BPO)?

Sum of all lease payments and BPO (all nominal amounts).

What is the initial recorded amount for a lease receivable under the gross method for a lease with a leasee guarantee of residual value?

Sum of lease payments and lessee guarantee amount (all nominal amounts).

What is the total interest revenue recognized over the term of a sales-type lease with an unguaranteed residual?

Sum of lease payments and unguaranteed residual (nominal amounts) less fair value of asset.

What amount is capitalized by the lessee when the lease includes a bargain purchase option (BPO)?

Sum of present value of lease payments and present value of BPO.

List the two ways of describing the amount of sales revenue recognized when the lessor capitalizes a sales-type lease with a bargain purchase option

Sum of present value of lease payments and present value of BPO; fair value of asset sold.

What amount is capitalized by a lessee when the lessee guarantees residual value at the end of the term?

Sum of present value of lease payments and present value of guaranteed amount.

How is the reported balance of lease receivables under the gross method computed?

Sum of remaining lease payments.

Describe the general rule regarding deferral of gain in a sale-leaseback for an operating lease.

The Seller/Lessee records the gain in a deferred credit and amortizes the deferred gain over the lease term by reducing the recorded rent expense in proportion to the amount of rent expense recognized.

Describe the general rule regarding deferral of gain in a sale-leaseback for a capital lease.

The Seller/Lessee will record the gain as an asset valuation allowance account (contra to the leased asset), and amortize the deferred gain over the lease term by reducing the recorded depreciation expense.

What residual value is used for depreciation when the lessee guarantees the residual?

The amount of the guarantee.

What is the amount of cost of goods sold recognized on a sales-type lease (STL)?

The amount recognized is book value of asset under lease

What is the basis for the lessor's computation of periodic interest revenue?

The basis is beginning net lease receivable for the period.

Define "lease term".

The fixed noncancelable term of the lease plus periods covered by bargain renewal options and plus all periods covered by renewal options during which there is a loan outstanding from the lessor to the lessee.

How are the initial direct costs for direct financing capital leases accounted for?

The initial direct costs are included in the lessor's gross receivable. Cash and other assets are decreased as a result of the costs.

Define "operating lease".

The lessee has no asset to depreciate in this lease.

Define "implicit interest rate".

The lessor's desired rate of interest.

Define "sale-leaseback transaction".

The owner of property sells its asset and immediately leases it back.

Define "lessee's incremental borrowing rate".

The rate, at lease inception date, the lessee would have incurred to borrow the funds necessary to purchase the leased asset.

List the two international lease capitalization criteria which are the same as US standards.

Title transfer and Bargain Purchase Option (BPO).

What is the annual rent expense or revenue calculation for operating leases?

Total rental over lease term/number of years in lease term.

What is the contra account for lessor using the gross method?

Unearned interest.

Describe the situation in which there is no deferral of gain when seller/lessee retains only minor use?

When PV of lease payments is 10% or less of FV of asset, no gain or loss is deferred

Describe the deferral of gain on a lease transaction when the seller does not maintain total use of the asset.

When PV of lease payments is more than 10% but less than 90% of asset's FV, losses will be immediately recognized, and gains will be recognized to the extent that they exceed the present value of minimum lease payments. Remaining gain is amortized under general rule.

Is a lessee guarantee of residual included in the minimum lease payments of both parties?

Yes, it is included.