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30 Cards in this Set

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bargain purchase option
a provision allowing the lessee to purchase the leased property for a price that is significantly lower than the property's expected fair value at the date the option becomes exercisable
bargain renewal option
a provision allowing the lessee to renew the lease for a rental that is lower than the expected fair rental at the date the option becomes exercisable
capital lease
a lease that is treated as if the lessor has transferred ownership of the property to the lessee and the rental payments made by the lessee to the lessor constitute a financing arrangement
cost of goods sold (sales-type lease)
the cost of the asset to the lessor, less the present value of any unguaranteed residual value
direct financing lease
leases that are in substance the financing of an asset purchase by the lessee
discount rate
the interest rate used by the lessee to compute the present value of the minimum lease payments; which is the lesser of (1) lessee's incremental borrowing rate or (2) the known implicit rate computed by the lessor
executory costs
the costs incurred during the economic life of leased tangible assets, such as insurance, maintenance and tax expenses
guaranteed residual value
the certain or determinable amount at which the lessor has the right to require the lessee to purchase the asset or the amount the lessee or a third-party guarantor guarantees the lessor will realize
implicit interest rate
the interest rate implicit in the lease that when applied to the minimum lease payments and any unguaranteed residual value accruing to the lessor, which causes the aggregate present value to be equal to the fair value of the leased property to the lessor
incremental borrowing rate
the rate that, at the inception of the lease, the lessee would have incurred to borrow the funds necessary to buy the leased asset on a secured loan with repayment terms similar to the payment schedule called for in the lease
incremental direct costs
the costs paid to independent third parties incurred in originating a lease arrangement, such as the cost of independent appraisal of collateral used to secure a lease, the cost of an outside credit check of the lessee, or a broker's fee for finding the lessee
initial direct costs
incremental direct costs and internal direct costs
internal direct costs
the costs directly related to specified activities performed by the lessor on a given lease, such as evaluating the prospective lessee's financial condition and evaluating and recording guarantees, collateral, and other security arrangements
internal indirect costs
the costs indirectly related to specified activities performed by the lessor on a given lease, such as advertising, servicing existing leases, and establishing and monitoring credit policies
lease
a contractual agreement between a lessor and a lessee that gives the lessee the right to use specific property, owned by the lessor, for a specific period of time in return for stipulated, and generally periodic, cash payments (rents)
lessee
the party that receives the right to use property owned by the lessor, in return for cash payments (rents) under the terms of a lease
lessor
the party that gives the lessee the right to use specific property, owned by the lessor, for a specific period of time under the terms of a lease
minimum lease payments
minimum rental payments adjusted for any guaranteed residual value, any penalty for failure to renew, and a bargain purchase option
minimum rental payments
minimum payments the lessee is obligated to make to the lessor under the lease agreement
minor leaseback
a leaseback in which the present value of the rental payments are 10% or less of the fair value of the asset
noncancelable
the lease contract is cancelable only upon the outcome of some remote contingency or that the cancellation provisions and penalties of the contract are so costly to the lessee that cancellation probably will not occur
off-balance-sheet financing
the result when a lease does not add debt on a balance sheet or affect financial ratios
operating lease
leases that are not classified as capitalized leases
operating method
the method of accounting for an operating lease whereby rent expense (and a compensating liability) accrues day by day to the lessee as the property is used
residual value
the estimated fair (market) value of the leased property at the end of the lease term
sale-leaseback
a transaction in which the owner of property (seller-lessee)sells the property to another and simultaneously leases it back from the new owner
sales price of the asset (sales-type lease)
under a sales-type lease, it is the present value of the minimum lease payments
sales-type lease
a direct financing lease which also accounts for the manufactuer's or dealer's gross profit (or loss)
third-party guarantor
a separate party which acts like an insurer by guaranteeing the residual value of leased assets
unguaranteed residual value
the amount of residual value which is not guaranteed