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41 Cards in this Set
- Front
- Back
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How does a lessee record a BPO?
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Capitalized at its PV.
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What's the B/S classification of a capital lease for a lessee?
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Both current & noncurrent. Current portion being money being paid on prin the next yr.
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What's considered a BPO?
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When the lessee can purchase the leased prop for significantly less than the expected FV of the prop at the date option becomes exercisable.
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How does a lessee amortize the lease liability?
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By the effective int method or allocation of lease payments method.
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How does a lessee account for impairment loss of a capital leased asset?
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If carrying amt of the asset may not be recoverable. Est the future net cash flows; & without discounting or considering int charges, if future cash flows is less than the carrying amount, impairment loss is recognized. Impairment loss recognized is the amount by which the carrying amt of the asset exceeds the FV of the asset.
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How does a lessee record a Guarantee of Residual Value?
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Has to be a guarantee by a the lessee or a third party RELATED, & should be capitalized at its PV.
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When does a lessee amortized the leased asset over the remaining est economic life of the asset?
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When it's a capital lease meeting either first two lease classification criteria - transfer of ownership or BPO.
*If not, amortize over lease term* |
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What are the 4 things that one condition needs to be met to classify as a capital lease?
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1. TO Transfer of ownership at end of lease
2. BOP Barg Purch Option 3. 75 75% of asset economic life is committed in lease term 4. 90 90% of leased property FMV is less or equal to PV of future lease pymts |
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What's the lessor's Net Investment in the Lease?
What's it's equation form? |
Present Value of lessor's Gross Investment in the lease.
Equation Form: NIL = PV of (MLP + Unguaranteed Residual Value) |
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What's the diff btw Sales Type Leases & Direct Financing Leases?
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Sales Type Leases are, in substance, Sales of Assets on an installment basis. STL contain a manufacturer or dealers profit (or loss) at inception & int inc. Direct Financing only int inc arises.
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Is the factor "PV of ordinary annuity" & "PV of annuity in arrears" the same thing?
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Yes
*You pay at the end of the period* |
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Is the factor "PV of annuity in advance" & "PV of annuity due" the same thing?
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Yes
*Pay in beginning of period* |
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How does a lessee record a capital lease?
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In an amt equal to the FV of the leased property at inception date or PV of the MLP's, whichever is lower.
Dr: Leased Under Capital Assets Cr: Obligations Under Capital Leases |
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What's an operating Lease?
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A lease that does not meet the 4 criteria of a capital lease. The leased property is not transferred from the books of the lessor to the lessee.
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Lessor's classify leases as either sales-type or direct-financing leases if all of what 3 criteria are met?
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1. The lease is a capital lease for the lessee
2. Collectibility of the MLP is reasonably predictable. 3. No important uncertainties exist regarding the unreimbursable costs yet to be incurred by the lessor under the lease. |
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What is Guaranteed Residual Value?
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A specifically determinable amount payable at termination of the lease.
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What's a manufacturer's or dealer's profit?
What's it's equation form? |
Equal to the PV of the MLP reduced by the cost of sales & by the initial direct costs.
Equation Form: Profit = PV of MLP - (Cost of Sales + Initial Direct Costs) |
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What's the Lessor's Sales Price in the lease in Capital Leases?
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It's equal to the PV of the lessor's minimum lease payments.
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What are a Lessor's Initial Direct Costs?
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Costs incurred by the lessor that are directly associated with negotiating & consummating completed leasing transactions. Examples: commissions, legal fees, cost of preparing documents & the applicable portion of the compensation of employees directly involved with completed transactions.
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What's a Sale Leaseback Trasaction?
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A trans that involves the sale of property to a purchaser-lessor & a lease of the same property back to the seller-lessee.
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what's the lessor's Gross Investment in Lease?
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Equal to the sum of Lessor's MLP & Unguaranteed Residual Value accruing to lessor.
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What's the lessors cost of sales?
What's it's equation form? |
BV (carrying amt) of asset leased out reduced by the PV of the unguaranteed residual value accruing to the lessor.
Equation Form: Cost of Sales= BV - PV of unguaranteed residual value |
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What's the lessor's unearned interest income?
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Diff btw the Gross Investment in the lease and the Net Investment in the Lease.
It's a contra-asset and is amortized by the "interest method" over the lease term. |
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What disclosure requirements are there for Lessee's?
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For capital leases: Gross amt of capital leases as of each B/S date & the PV of future MLP as of the date of the latest B/S in the aggregate and for each of the 5 succeeding yrs.
For Oper leases greater than 1 yr: disclose the future minimum rental pymts req'd, in aggregate and for each of next 5 yrs & a gen'l description of leasing arrangements. |
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Are Sale-Leaseback trans accounted for the same as other leasing trans?
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Yes
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How is deffed G or L deferred & amortized under a capital lease under sale-leaseback trans. for the lessee/seller?
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It will be deferred & amortized in proportion to the amortization of the leased asset. For instance, in a capital lease where there is no ownership transfer and the asset is amortized in a straight-line manner, the deferred G or L will be amortized in a straight-line manner over the term of the lease. If ownership transfers then it will be amortized over the est life of the asset.
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What are 3 Deferment Requirement Exceptions?
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1. Minor Portion Retained
2. Excess Gains 3. Economic Losses |
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What's the purpose of Sale-Leaseback Transaction?
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The seller-lessee obtains financing for the use of the property & the purchaser-lessor (usually a financial institution or investor) obtains interest income.
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With a Sale-Leaseback transaction, there is generally a G or L, what happens to it?
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A G or L on the sale of the asset will be deferred & amortized.
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How is a deferred G or L deferred & amortized under an operating lease under Sale-Leaseback transaction for the lessee/seller?
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The G or L will be deferred & amortized in proportion to the related gross rentals charged to expense during the period. This usually will result in SL amortization.
At the time of sale, a deferred gain should be reported as a deferred credit. |
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How does a Purchaser/Lessor account for a Sale-Leaseback transaction?
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In the same manner as for other leases, that is, as if the property had been purchased from and leased to two seperate parties.
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What disclosure is req'd for Lessor's for sales-type leases?
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Sales Type & Direct Financing Leases: The Lessor must disclose the net investment components, including the future MLP, unguaranteed residual value, unearned income & the future MLP to be received in each of the succeeding 5 yrs.
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What disclosure is req'd for Lessor's for operating leases?
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Disclose the cost & carrying amount, if different, of property leased or held for leasing, by major class & total AD; the minimum future rentals on noncancelable leases, in aggregate, & for each of the next 5 yrs; & a gen'l description of leasing arrangements.
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What's a lease term?
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The noncancelable term of the lease plus the following 4 things:
1. All periods covered by bargain renewal options 2. All periods for which failure to renew the lease imposes a penalty on the lessee in an amount such as to make renewal reasonably assured. 3. All periods preceding the date that a BPO becomes exercisable. 4. All periods representing renewals or extensions of the lease term or lessors option. |
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What are executory costs?
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Costs that are expenditures such as insurance, maintenance & taxes req'd to be paid on the assets economic life.
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What's a PV discount rate?
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The lessee uses the incremental borrowing rate in computing the PV of the minimum lease payments.
However if the implicit int rate is lower than the lessees incremental borrowing rate, lessee will use implicit rate & discount the lease pymts. *Implicit rate is lessor's rate* |
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If a lease does not contain a BPO, what 5 things are included in MLP?
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1. Minimum rental pymts called for by the lease ov the lease term.
2. Any guarantees of a residual value of leased asset at the end of the lease. 3. Any penalty that the lessee may be req'd to pay upon failure to renew the lease. 4. For lessors, in addition to above, MLP also include any guarantee of the residual value. 5. MLP's do not include executory costs paid by either party, no do they include any contingent rentals. |
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If a lease contains a BPO, what included in the MLP?
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Only the minimum rental pymts over the lease term up to the date at which the BPO becomes exercisable & the pymt called for by the BPO.
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What's residual value?
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The estimated FV of the leased property at the end of the lease term.
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How should a lease that transfers substantially all of the benefits and risks incidental to the ownership of property be handled?
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Should be accounted for as an acquisition of an asset and the incurrence of a liability by the lessee, & as a sale or financing agreement by the lessor.
All other leases should be accounted for as operating leases. |
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Should the lease term ever extend beyond the date at which a BPO becomes exercisable?
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No
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