ch 18 intermediate accounting 2

Operating Lease

for a lessor, a lease that does not meet any one of the five group criteria. For a lessor, a lease that does not meet any one of the five Group 1 criteria or the Group 2 criteria

sales-type lease

for a lessor, a lease that meets any one of the five Group 1 criteria

direct financing lease

for a lessor, a lease that meets both of the Group 2 criteria but none of the Group 1 criterion.

both the lessor and the lessee have to determine the appropriate discount rate at the commencement of the lease.

how do you compute the present value of the lease payments

total payments: Sum all of the payments that a company will make. (annual payments, lease payments, lease incentives, initial direct costs)

how do you do the 1st step of subsequent measurement: operating lease: Lessee

straight line expense: allocate the total payments computed in step 1 and divide it by the years/term. each year, we include this lease expense on the income statement in operating income

how do you do the 2 step of subsequent measurement: operating lease: Lessee

period interest: make a table with payment, interest expense, reduction in lease liability, and balance write down the payment which are the annual payments not the total payments divided by the term. to find the interest you have to multiply the interest times the balance. next subtract payments and interest expense to get the reduction in lease liability. then subtract the reduction in lease liability and balance which is the lease liability.

how do you do the 3 and 4 step of subsequent measurement: operating lease: Lessee

Complete Financing §Many leases allow the lessee to enter into a lease agreement with little or no money down and with no security deposit. §The lessee maintains its cash and other assets, resulting in 100% financing for the leased asset. Lessor Bears the Risk of Obsolescence The risk of obsolescence (outdating) is carried by the owner of the asset, the lessor, and is reflected in high lessee monthly rental payments §However, the lessee is willing to pay this premium when leasing an asset that is subject to rapid technological obsolescence. §Lessee can easily upgrade to newer technology

what are some advantages in leasing over buying

operating lease

If none of the Group I criteria is met, the lessee classifies the lease as a(n) ___

finance lease

If the lease transaction meets any one of the five Group I criteria, the lessee classifies the lease as a(n) ___

lessee

The party acquiring the use of the asset is the___. They also classify all leases as either operating leases or finance leases.

Group II criteria

a criteria in which apply only to lessors, determine the extent to which the lessor will absorb the credit risk related to the lease contract.

lease payments

___ commonly include the fixed payments less any lease incentives paid or payable to the lessee, as well as amounts that are probable of being owed by the lessee under residual value guarantees (if the lessee provides the guarantee)

lease

a contract that gives the lessee the right to control and use the property, plant, or equipment legally owned by the lessor for a specified period of time in return for periodic payments or rentals made by the lessee

group 1 criteria

a criteria in which apply to both lessees and lessors, provide guidance on which party to the lease effectively "owns" and controls the asset.

amortization of the right of use asset. make a table with lease expense interest and amortization of right of use asset. on lease expense write down the number you got when you added up the total payments not the annual payments. next for interest column just write the the interest you got from the previous table but 0 goes at the end ofr some reason then subtract lease expense and interest column to get the amortization of right of use asset the journal entries for end of the first: debit: lease expense debit: lease liability credit: cash credit: accumulated amortization-RoU asset JE for the end" debit: lease expense credit; accumulated amortization debit: accumulated amortization - RoU asset creditL Right of-Use-Asset

how do you do the 5 step of subsequent measurement: operating lease: Lessee what are the JE for end of the first year and end of the last year

the initial measurement for a finance lease is the same as for an operating lease: record liability and right of use asset debit: right of use asset credit: lease liability

how do you find the initial measurement for a finance lease: Lessee what are the journal entries

in order to find the initial measurement of the operating lease use the present value of an annuity due chart and multiply it by the payment and thats how you get the initial measurement of the lease liability. if there are any prepayments net of lease incentives and intinital direct costs then add that to the initial measurement of the lease liability to get the initial measurement of the right of use asset JOurnal entry: Debit: RIght of use asset credit: lease liability JE: debit: lease liability credit: cash

how do you find the initial measurement of the operating lease: Lessee what is the journal entry for recording right of use asset what is the JE to record the first annual lease payment

they use the incremental borrowing rate

the lessee also used the implicit rate but when they cant what do they use

lessor

the owner of the asset. They also classify leases as operating, sales type, or direct financing

incremental borrowing rate

the rate of interest that a lessee would have to pay to borrow an amount equal to the lease payments

Overall Cost of the Asset §In general, the cost of the asset over the life of the lease is higher than if the lessee purchased the asset. §The lease payments must compensate the lessor for the use of the asset, financing costs, and the risk of ownership. Loss of Ownership §Unless the lease arrangement includes a transfer of ownership or a purchase option, the asset does not belong to the lessee at the end of the lease term. (Let's think about your favorite ice cream. When you buy a big tub, you can eat it whenever you want, but it costs more at first. When you borrow a toy, it might end up costing more in little payments than if you saved up and bought it. And, if you're just borrowing the toy, when it's time to give it back, it isn't yours to keep. You have fun with it but then say goodbye, unless you can buy it at the end. So, if you borrowed something like a bike, and you give it back later, how would you fee

what are some disadvantages of leasing over buying

§Step 1: Determine the total payments to be made by the lessee from the lease inception date to the termination date, including prepayments and initial direct costs incurred by the lessee, net of any incentives received. §Step 2: Determine the amount of lease expense to be recognized each year by dividing the total payments computed in Step 1 by the lease term. This is a straight-line expense §Step 3: Compute the periodic interest expense on the lease liability by using the effective interest rate method. §Step 4: Compute the reduction in the lease liability each period as the payment made that period less the interest computed in Step 3. §Step 5: Determine the amortization of the right-of-use asset, which is measured as the difference in the straight-line lease expense and the interest expense from Step 3.

what are the 5 steps of subsequent measurements

1. Identify a lease contract. (First, make sure it's okay to borrow it. That's like asking, "Can I play with this?") 2. Identify lease and nonlease components and allocate costs to each component. (Next, decide what's just for borrowing and what's not. Imagine borrowing a game console but buying your own games to play on it.) 3. Classify the lease. (Then, figure out what kind of borrowing it is. Is it like borrowing for a short time, or a long time?) 4. Recognize and initially measure the lease transaction. (When you start borrowing, write down what you borrowed and how much it costs. It's like saying, "I borrowed this, and here's what I need to give back.") 5. Determine subsequent measurement of the lease transaction. (As time goes on, keep track of what you've given back already and what you still owe. It's like having a chart that shows how much longer you can play before you give it back.)

what are the key steps in the lease accounting process

Business and Financial Flexibility §Lease terms can allow the lessee to upgrade the asset, return the asset, continue the lease with extended terms, modify rental amounts, or exercise a purchase option. §The lease may also permit the lessee to obtain an additional source of financing without affecting existing lines of credit. Tax Benefits §If equipment is leased, the entire lease payment may be tax deductible. -When a company purchases equipment by issuing long-term debt, only the interest part of the payment is tax deductible. §If a company leases a building, the total lease payment may be fully tax deductible as rent expense.

what are two more advantages of leasing over buying

1.The lease liability determined as the present value of the remaining lease payments as of the commencement date. 2. +Lease payments the lessee makes to the lessor at or before the commencement date. 3. + Any initial direct costs the lessee incurs. 4. - A reduction for any lease incentives the lessee receives.

what components does the right of use asset include

implicit rate

what is the rate of interest that sets the present value of the lease payments plus the present value of the amount that a lessor expects to obtain from the leased asset at the end of the lease term equal to the sum of the fair value of the leased asset and any deferred initial direct costs incurred by the lessor