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33 Cards in this Set

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Advantages of leasing for Lessee
1) Financing benefits a) 100% financing
b) fewer restrictions and more flexible than other lease agreements
c) creates claim against leased assets, not all assets
2)Risk Benefit - risk is born by lessor
3) Tax benefit - lessee can write off full cost of asset, including parts related to land
Advantages of leasing of Lessee continued
4) Financial Reporting Benefit - operating leases do not add liability or asset on balance sheet.
5) Billing benefit- certain contract work leasing may permit contractor to charge more because interest in rental payments is allowed as a contract charge
Capital Lease
A lease that transfers substantially all the risks and benefits or ownership is in substance a purchase by the lessee and sale by the lessor and is a capital lease.
Operating Lease
A lease that does not transfer all the risks and benefits of ownership.
Lessee Classifications
1) Capital lease
2) Operating lease
Lessor lease classifications
1) Sales type lease
2) Direct financing lease
3) Operating lease
Criteria applicable to lessee and lessor
a. lease transfers ownership of property to the lessee by the end of the lease term

b. lease contains bargain purchase option
c. lease term is equal to 75% or more of the estimated economic life of the property

d. present value of the minimum lease payment is equal to 90% or more of the fair value of the property.
Criteria applicable to lessor only
a. collectibillity of minimum lease payment is reasonably assured

b. No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease
Classification by the lessee
a. Capital lease - meets one or more criteria for lessee

b. Operating lease - does not meet any criteria applicable to lessee
Lessor - Sales type lease
1) one or more criteria for lessee
2) both criteria for Lessor
3) must result in manufacturers or dealers profit or loss- Fair value of leased property at the inception of the lease is greater or less than cost or carrying value
Lessor - Direct Financing Lease
1 ) One criteria for lessee is met
2) both criteria for lessor is met
3) Must not result in manufacturer or dealers loss or profit
Operating lease
Lease that meets none of the lessee's criteria or does not meet both lessor's criteria, all leases other than sale-type and direct financing leases
Annuity Due
Payments made at beginning of each period
as opposed to regular annuity payment made at end of each period.
Effective interest method
payment calculated with constant interest rate applied to new principal balance
Executory Costs
Ownership type costs such as insurance, maintenance, and property taxes
usually paid by the lessee in a capital lease
Minimum lease payment
lease payment minus the executory costs paid by the lessor when calculating present value
Classification of Capital Lease
1)Present value of next year's payment
current liability is the same each year (NPV of each payment)
remainder must be calculated. remainder is non current. For Finance lease the following PMT-PVyr2 pmt, PMT-PVyr3 pmt etcetra to get current portion (subtracting out unearned interest on lease)
Classification of Capital Lease on Balance Sheet
Change in the present value
Current liability is amount by which total balance of lease liability will decrease in the next year.
Guaranteed residual value
Company agrees to residual value at end of the lease (no transfer of ownership or bargain purchase option)
Leased equipment value as follows
Present value of leased equipment rate x years. (annuity)

Present value of guaranteed residual value of property pv 1 time payment

Capital lease example (payment at end of year)
Dr Lease Equipment 100,000
Cr Capital Lease Obligation 100,000

Dr Interest Expense 12,000
Capital Lease Obligation 20,923.45
Cash 32,923.45
Dr Depreciation Expense 25,000
Cr Accum Depreciation
Leased Equpment 25,000
2nd annual pmt
Dr Interest Expense 9489.19
Dr Capital Lease Obligation 23,434.26
Cr Cash 32,923.45
Capital lease example (payment at beginning of year) annuity due
Dr Lease Equipment 112,000
Cr Capital Lease Obligation 112,000
1st payment Jan 1
Dr Capital Lease Obligation 32,923.45
Cr Cash 32,923.45
Dr Depreciation Expense 28,000
Cr Accumulated Depreciation 28,000
Dec 31 pmt
Dr Interest Expense 9,489.19
Cr Accrued Interest on Capital
Lease Obligation 9,489.19
Jan 1 pmt
Dr Accrued Interest on CL 9,489.19
Dr Capital Lease Obligation 23,434.26
Cash 32,923.45
Bargain Purchase Option
Present value of payments discount at rate+ present value of 1 pmt for the bargain purchase option
Dr Leased Equipment 128,160.63
Cr Capital Lease Obligation 128,160.63
Operating Lease (Lessor)
Dr Equipment leased to others 300,000
Cr Cash 300,000
Collection of annual payment
Dr Cash 50,000
Cr Rental Revenue 50,000
Dr Insurance Expense 2,000
Cr Cash 2,000
Dr Depreciation Expense
leased equipment 30,000
Cr Accum Depreciation
leased to others 30,000
Direct Financing Lease (no unguaranteed residual value)
Dr Equipment leased to others 100,000
Cr Cash 100,000
Dr Lease Receivable 131,693.80
Cr Equipment lease to others 100,000
Cr Unearned Interest: lease 31,693.80
Dr Cash 32,923.45
Cr Lease Receivable 32,923.45
Dr Unearned Interest Lease 12,000
Cr Interest Revenue Lease 12,000
Direct Financing Lease No ungauranteed residuals payment in advance
Dr. Equipment leased to others 391,371.20
Cr Cash 391,371.20
Lease receivable 500,000
Equipment leased to others 391371.20
Unearned interest:leases 108,628.80
Dr Cash 100,000
Cr Lease Receivable 100,000
Dr Unearned Interest: Lease 40,791.97
Cr Interest Revenue :Lease 40,791.97
Present Value of Equipment
is present value of payments plus present value of residual value or bargain price option
Lease amount is recorded at undiscounted amount
Sales Type Lease
Difference between sales type lease and direct financing are manufacturer's or dealer's gross profit or loss and accounting for initial direct costs
dealers loss or profit is difference between sales price (minimum lease pmt at implicit rate of interest) cost or carrying value of asset plus any indirect costs less present value of unguaranteed residual value accruing to the lessor
Sales Type Lease example (annuity due) Lessor
Dr. Lease Receivable 300,500
Cr. Sales Revenue 190,008.49
Cr. Unearned Interest: Lease 110,491.51
Dr. Cost of Asset Leased 120,000
Cr. Merchandise Inventory 120,000
Dr. Cash 30,000
Cr. Lease Receivable 30,000

Dr. Unearned Interest: Leases 19,201.02
Cr. Interest Revenue: Leases 19,201.02
Statement of Cash Flows leases (Lessee)
lessee: operating lease each payment is cash outflow from operations

lessee: sales lease each interest payment is operating cash outflow, principal is financing outflow
Statement of Cash Flows leases (Lessor)
Lessor: operating lease, each payment received as cash inflow from operations
Direct financing lease: asset purchase as cash outflow from operations, Interest received inflow from operations and principal as cash inflow from investing activities
Sales Type Lease: cash paid for asset as cash outflow from operations and payment received as cash inflow from operations
Executory Costs (Lessee)
Always subtract out from lease payment. Expensed yearly by lesee on capital lease
Subtract from yearly lease pmt when calculating NPV or lease. Also, that amount is the yearly lease pmt plus the executory costs
Dr Executory Costs
Dr Capital lease Obligation
Cr Cash
Depreciation Costs
Expense Yearly for capital lease
Dr. Depreciation Expense
Cr Accum Depreciation Leased Equipment
Annuity Due Lease
Interest Expense Accrues at end of year, even though payment wont be until 1st of year.
At first of year accrued interest is debited to get rid of liability ie
Dr Executory Costs 3,450
Dr Accrued Interest 28,614
Dr Capital Lease Obligation 37,936
Cr Cash 70,000