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21 Cards in this Set
- Front
- Back
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A lease is an agreement in which a __ conveys the right to use property, plant, and equipment, usually for a stated period of time, to the __
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lessor, lessee
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When a lease is more like a rental agreement, it is __
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an operating lease
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Lessor's treat capital leases as either __ or __
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direct financing leases
sales-type leases |
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an operating lease is
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off balance sheet financing
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The advantage of operating leases is that
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the debt-to-equity ratio looks better
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In capital (or finance) lease accounting, the lessee is
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essentially buying and financing the leased asset (record an asset and liability)
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assets
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resources that are owned OR controlled
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To be a capital lease, a lease must meet at least one of four criteria:
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1. ownership transfers to lessee at the end of the term
2. a bargain purchase option (BPO) exists 3. the non-cancelable lease term is equal to 75% or more of the expected econ life of the asset 4. the PV of the minimum lease payments (MLP) is 90% or more of the fair value of the asset |
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a bargain purchase option gives the lessee the right to purchase the leased asset at a price
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much lower than the expected fair value of the property, when the exercise of the option seems reasonably assured
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the lease term is considered to be
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the non-cancelable term plus any periods covered by bargain renewal options
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the lessor must meet 2 additional conditions for the lease to be classified as either a direct financing or sales-type lease:
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1. collectability of payments must be reasonably predictable
2. costs to the lessor that may be incurred must be reasonably predictable and performance by the lessor is substantially complete |
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Lease payments generally begin
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on the first day of the lease (annuity due situation)
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Treatment of leasehold improvements:
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allocated as depreciation expense over the useful life to the lessee
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For capital leases, the amount capitalized equals
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the PV of the minimum lease payments (BUT the amount recorded cannot exceed the fair value)
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In a direct financing lease:
If not a manufacturer, the lessor's cost usually equals __ and the lessor is thus __ for a profit |
the fair value of the leased asset
no selling or leasing |
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In a sales type lease:
The lessor likely is __ and is thus trying to __ |
a manufacturer or dealer
sell the leased asset to make a profit as well as earn interest revenue |
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Cannot make a profit if there is no
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risk
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Lessee would normally depreciate a leased asset over __
However, if ownership transfers or a BPO is present, the asset should be depreciated over __ |
the term of the lease
it's useful life |
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In the case of a sales-type lease, the journal entry would include
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COGS as well as sales revenue (PV of payments)
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When a BPO exists, the lessee __
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adds the PV of the BPO price to the PV of the payments
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When a BPO exists, the lessor __
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subtracts the PV of the BPO from the amount to be recovered (fair value) to determine amount that the payments should equal
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