ACCOUNTING FOR LEASES UNDER FAR
How much interest does the lessor receive over the life of an operating lease?
$0 trick question!
How does the lessee record the capital lease?
At lower of FV or PV of minimum lease pmts, using the lower of lessee's incremental borrowing rate or rate implicit in the lease, if known by lessee.Note: minimum lease pmts include pmts, bargain purchase option, and guaranteed residual value. They do not include executory costs or an optional purchase.
what is the cost of asset equal to on a sales-type lease
the PV of the minimum lease payments at the implicit rate
what rate does the lessor use for the present value
what rate does the lessor use for the present value
Expenses for finance vs. operating lease?
finance= interest expense operating= lease expense
At the inception of a capital lease, the guaranteed residual value should be
Included as part of minimum lease payments at present value At the inception of a capital lease, the lessee must record an asset and a liability based on the PV of the minimum lease payments. The minimum lease payments are the payments that lessee is required to make in connection with the leased property, including rent payments, bargain purchase option, and guaranteed residual value. Minimum lease payments (MLP) are recorded at present value. The whole guaranteed residual value is included in MLP.
Sales-Type - Lessor Adjusting Entries
Interest Receivable...XXX .Interest Revenue.....XXX No Depreciation entry because the Lessor takes the Equipment off of their books
Recording a Direct Financing (Finance) Lease
***Same as Sales-Type but b/c only 1 Profit, only steps #1 - #3 apply 1. Gross Investment (Lease pmt + Unguar. Residual) 2. Net Investment (#1 X PV) 3. Unearned Interest Rev (#1 MINUS #2) *** PV = CV of receivable = Cost of asset sold
Distinction between a direct financing lease and a sales type lease (lessor)
- A sales type lease involves manufacturer's or dealer's profit (or loss) and a direct financing lease does not. - recognition of dealer's profit at the inception of the lease- - difference between fv and the lessor's cost or carrying amount
Conditions for a lease to be treated as a finance-type lease:
1) Lease transfers ownership to the lessee by the end of the term 2) contains written purchase option reasonably certain to excersize 3) pv at beginning of minimum lease payments > lease property fair value 90% 4) Lease term > 75% or more of the economic life 5) specialized/ no alternative use
Recording a Sales-Type (Finance) Lease
1. Gross Investment (lease receivable) === Lease Pmt + Unguar. Residual Value (Estim FV) 2. Net Investment === Gross Investment (#1) X PV3. Unearned Interest Revenue === Gross Investment (#1) --- Net Investment (#2) 4. COGS=== Cost of Asset --- PV Unguar. Residual Value 5. Sales Revenue=== PV of minimum lease payments
When is a bond issued at a discount? A premium?
A bond is issued at a discount when the coupon/stated interest rate is less than the market/effective rate of interest.A bond is issued at a premium when the bond interest rate is greater than the market rate of interest.
Bain Co. entered into a 10-year lease agreement for a new piece of equipment worth $500,000. At the end of the lease, Bain will have the option to purchase the equipment. Which of the following would require the lease to be accounted for as a capital lease? A. The lease includes an option to purchase stock in the company. B. The estimated useful life of the leased asset is 12 years. C. The present value of the minimum lease payments is $400,000 .D. The purchase option at the end of the lease is at fair market value.
B. The estimated useful life of the leased asset is 12 years. There are four criteria for a capital lease. In summary, they are: Transfer of ownership Bargain purchase option Lease term is 75% or more of estimated economic life Present value of minimum lease payments at least 90% of excess of fair value of leased property This answer meets item #3 above.
When doing the Sims, why should you always do the initital entry of a lease whether or not its finance or operating
Because they are the same entry so either way you do it, you'll get it right, easy points
Journal Entry to record the beginning of an operating lease lessee
DR ROU asset CR Lease liability *usually use PV annuity due
Entry for a Sales Type Lease LESSEE
DR. Lease Pmts Rec (Annual lease pmts. X N)... CR. Unearned Interest Income (PLUG)... CR. Sales Revenue (CV of lease) AND DR. COGS.... CR. Inventory (asset sold)
Journal entry to record 2nd/3rd/4th payment of an operating lease under the lessee
Debit Lease expense Debit lease liability Credit cash Credit amor of ROU asset
Record amoritization Finance type lease lessee
Dr. Amoritization expense Cr. Accumulated amoritization -ROU asset
Finance w Non-Lease Costs - Lessee End of Lease Term
Dr. Amortization Expense......XXX Cr. Right-Of-Use Asset........XXX For Full Lease Payable Amount
Sales-Type - Lessor's First Payment
Dr. Cash Cr. Lease Receivable
Record first lease payment Journal Entry finance type lease lessee
Dr. Interest Expense Dr. Lease Liability Cr. Cash
Subsequent Entries Finance type lease LESSEE
Dr. Intrest expense D.r. Lease Liability Cr. Cash/ lease payable
Sales-Type, Lessor Issuance Without Profit
Dr. Lease Receivable Cr. Equipment
Lessor - Sales Type Lease - JE
Dr. Lease Receivable Cr. Fixed Asset Cr. Gain (DR if a loss)
Initial Journal entry for the LESSOR of a finance type lease
Dr. Lease Receivable Dr. Residual asset Credit Equipment
Journal entry at inception of an operating lease for a lessor
Dr. Lease Recievable Cr. Unearned income Total recievable= Annuity payment times the number of payments made
Initial journal entry for a finance type lease LESSEE perspective
Dr. Right of Use (ROU) Asset Cr. Lease liability
Finance Lessee Issuance with Guaranteed RV
Dr.Right-of-use Asset. Cr. Lease Payable Value of Lease Payable is PV of Lease Payments AND PV of guaranteed RV
Sales-Type - Lessor End of Lease; Guaranteed RV
FMV = RV Dr.Equipment Cr. Lease Receivable Cr. Interest Revenue FMV <RV Dr. Equipment. Dr. Cash Cr.Lease Receivable Cr.Interest Revenue Since RV is guaranteed, we record cash rather than a loss
What is a sales type lease?
In a sales-type lease, the lessor is assumed to actually be selling a product to the lessee, which calls for the recognition of a profit or loss on the sale
On January 1, a company enters into an operating lease for office space and receives control of the property to make leasehold improvements. The company begins alterations to the property on March 1 and the company's staff moves into the property on May 1. The monthly rental payments begin on July 1. The recognition of rental expense for the new offices should begin in which of the following months?
January The lessee should begin the recognition of rental expenses for the new office in January as rent expense is recorded over the lease term.
Operating lease amoritization schedule setup
Lease. interest Amor CV expense exp. Rou asset. Rou asset A1 [A] - [ (A1*PVfactor)] = [C ] [. A1-C. ]
Able Co. (Lessor) leased equipment to Baker (Lessee) under a noncancellable lease with a transfer of title. Will Able record depreciation expense on the leased asset and interest revenue related to the lease?
Lessee - Depreciation Expense and Interest Revenue Lessor - Interest Revenue Only
Lessee Capital Lease Criteria (GAAP)
Lessee = Buyer- Only need 1 condition to Capitalize: (O) Ownership transfers at lease end (W) Written bargain purchase option (N) 90% leased property FV < (or =) PV of lease payment (S) 75% or more of asset economic life is over lease term
Assuming that no direct costs are involved, what are the components of the lease recievable for a lessor involved in a direct-financing lease?
Lessors recording a lease receivable for a direct-financing lease should include the minimum lease payments PLUS any residual value. The reason for this is because the lessor can also expect to collect this residual value from the lessee at the culmination of the lease.
Lessor lease receivable direct fianancing lease formula
Minimum Lease payments + Residual Value
Operating Leases conditions
NO OWNES!!!!
Finance w Non-Lease Costs - Lease Payment Calculation
Normal Selling Price = (LP - NonLease Costs)*(PV of Residual)
Bargain Purchase Option - Lease Payment Calculation
Normal Selling Price = (LP)(PVAD) + (BPO Price)(PVof$1)
Bargain Purchase Option - Lease Payable Amount
Present Value of Lease Payments + Present Value of BPO
Journal Entry for payments made during an operating lease for the lessor
RUD R= Rental income U= unearned income D= depr. Expense Dr. Cash Dr. Unearned Revenue Dr. Depreciation Expense Cr. Rental income Cr. Lease Rec. Cr. Accum Depr
On January 1 of the current year, Tell Co. leased equipment from Swill Co. under a 9-year sales-type (finance) lease. The equipment had a cost of $400,000 and an estimated useful life of 15 years. Semiannual lease payments of $44,000 are due every January 1 and July 1. The present value of lease payments at 12% was $505,000, which equals the sales price of the equipment. Using the straight-line method, what amount should Tell recognize as depreciation expense on the equipment in the current year?
The lessee records the lease as an asset and a liability at the lower (lesser) of the fair market value of the asset at the inception of the lease, or cost (present value of the minimum lease payments).Lease should be depreciated (amortized) over the lease term if the lessee does not take ownership of the asset by the end of the lease or if there is not a bargain purchase option. Present value of minimum lease payments $505,000÷ Lease term ÷ 9= Straight-line depreciation expense $ 56,111
Lessee interest rate
The lessee uses the incremental borrowing rate, determined as the lesser of rate implicit in the lease / rate available in the market to the lessee
Peg Co. leased equipment from Howe Corp. on July 1, year1 for an eight-year period expiring June 30, year 9. Equal payments under the lease are $600,000 and are due on July 1 of each year. The first payment was made on July 1, year 1. The rate ofi nterest contemplated by Peg and Howe is 10%. The cash selling price of the equipment is $3,520,000, and the cost of the equipment on Howe�s accounting records is $2,800,000. The lease is appropriately recorded as a sales-type lease. What is the amount of profit on the sale and interest revenue that Howe should record for the year ended December 31, year 1?
profit on sale= 720,000 3,520,000(sales)- 2,800,000 (cogs) interest revenue= Total net lease payments receivable on 7/1/Y1 = $3,520,000- 600,000(first payment)= 2,920,000 net receivable Interest revenue= $2,920,000 *10% * 6/12 (partial year) interest revenue= $146,000
Difference between the finance type lease Lessee initial entry vs. Operating lease initial entry
there is none, they are the same entry! Dr. Right of Use (ROU) Asset Cr. Lease liability
