Chapter 21 Accounting For Leases

Front 1

PV of Minimum lease payments: 3 Concepts

Back 1

1. Minimum lease payments

2. Executory costs

3. Discount rate

Front 2

Minimum lease payments include:

Back 2

1. Minimum rental payments

2. Guaranteed residual value

3. Penalty for failure to renew or extend the lease

4. Bargain-purchase option

Front 3

Executory costs

Back 3

Insurance, maintenance, and tax expenses that leased tangible assets incur during their economic life

Front 4

Executory costs (do/do not) represent payment on or reduction of the obligation.

Back 4

do not

Front 5

Incremental borrowing rate

Back 5

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

Front 6

When must the lessee use the implicit borrowing rate?

Back 6

When it:

1) can determine the rate

2) finds out that it is less than the incremental borrowing rate

Front 7

Implicit interest rate

Back 7

Discount rate that, when applied to the minimum lease payments and any unguaranteed residual value accruing to the lessor, causes the aggregate present value to equal the fair value of the leased property to the lessor

Front 8

Criterion for depreciating a capital lease asset like a normal asset

Back 8

Lease agreement:

1) transfers ownership from the lessor to the lessee

2) contains a bargain-purchase option

Front 9

If a lease does not transfer ownership or does not contain a bargain-purchase option, how does the lessee depreciate the asset?

Back 9

It depreciates the asset over the term of the lease.