Chapter 21

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Author:
atcannon
ID:
287477
Filename:
Chapter 21
Updated:
2014-11-01 12:24:42
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Accounting 302
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Description:
Accounting for Leases
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  1. Lease
    contractual agreement between a lessor and a lessee
  2. Lessee
    has the right to use specific property, owned by the lessor for a specified period of time
  3. Lessor-who are they &
    3 types
    • Owner of the property
    • Banks
    • Captive leasing companies
    • Independents
  4. Banks 3
    • Largest
    • low-cost funds 
    • purchases assets at lower cost
  5. Captive leasing companies 3
    • 1.subsidiary who performs leasing operations for  parent company.
    • 2.point of sale advantage in finding leasing customers
    • 3.product knowledge
  6. Independents 2
    • 1.Develops innovative contracts for lessees
    • 2.can act as a leasing subsidaiary
  7. Advantages of Leasing 6
    • 1. 100 % financing at fixed rates
    • 2. Protection against obsolescence
    • 3. Flexibility
    • 4. Less costly financing
    • 5. tax advantages
    • 6. off-balance-sheet financing
  8. Questions to ask before beginning a lease problem? 4
    • 1. Lessee or lessor problem?
    • 2. Operating or capital?
    • 3. Salvage value? Guaranteed or not?
    • 4. Lease payment given? not, calculate PV
  9. Criteria to determine operating or capital lease
    Lessee: one or more of 4
    • 1. Transfer of Ownership
    • 2. Bargain Purchase Option
    • 3. Lease term > 75% of Economic Life
    • 4. Is PV of Payments > 90% of FMV
  10. Criteria to determine operationg or capital lease
    Lessor: one or more of 4
    both of 2 addition criteria true
    • 1. Collectibility of payments predictable
    • 2. No important uncertainties
  11. Executory costs 4
    • insurance
    • maintenance
    • tax expenses
    • not included in minimum lease payments
  12. PV of minimum lease payments include 4
    • 1. Minimum Rental Payments
    • 2. Guaranteed Salvage Value
    • 3. Penalty for Failure to Renew or Extend Lease
    • 4. Bargan Purchase Option
  13. Computation of Payments 
    Lessor
    • BV or FMV of the asset
    • Less: PV of Salvage Value
    • =Amount to recover through annual payments
    • / Factor (annuity or annuity due)
    • = Annual Rental Payments
  14. Total Financing Cost
    Includes 3 calculation steps
    • 1 Anneal Lease Payment - Executory Cost
    •   = Annual Rental Payments (ARP)
    • 2. ARP * Lease terms
    •   = Cash Disbursed-CD (net of executory Cost)
    • 3. CD - PV of Lease Payments
    •   = Interest Expense
  15. Journal Entries for Capital Lease
    Lessee:
    1. Record Lease
    2. Initial Payment
    3. Amortization & Interest Yr-end
    4. Depreciation yr-end
    5. Other Payments
    • 1. Dr. Equipment /Cr. Liability
    • 2. Dr. Liability / Cr. Cash
    • 3. Dr. Interest Expense / Cr. Interest payable
    • 4. Dr. Dep. Exp / Cr. Accum. Dep.
    • 5. Dr. In. Pay or Int. Expense, Liability
    •     Cr. Cash
  16. Lessee
    Salvage value
    Includes in cost of equipment and liability if SV is guaranteed
  17. Lessee
    Interest rate
    Uses lessor's interest rate if known and lower
  18. Lessee
    Depreciation
    Based on life of lease, unless transfer of ownership or bargain purchase option exist, then use life of asset
  19. Lessee
    capitalizing the asset
    cannot capitalize the asset at more than its fair value
  20. Journal Entries for Capital Lease
    Lessor
    1. Record Lease
    2. Initial Payment
    3. Interest
    4. Other Payments
    • 1. Dr. Lease Receivable / Cr. Equipment
    • 2. Dr. Cash / Cr. Lease Receivable
    • 3. Dr. Interest Rec. / Cr. Interest Income
    • 4. Dr. Cash / Cr. Lease Rec. , Interet Rec/Inc
  21. Lessor
    Salvage Value
    Always assumes SV will be received; lessor includes SV in Lease Receivable
  22. Interest Amortization Table
    • Date
    • Annual Lease Payment
    • Interest
    • Reduction of Obligation
    • Lease -net
  23. Direct Financing Lease
    Lessor 2
    • 1. FV of Asset = its cost
    • 2. profit from interest revenue over time
  24. Sales-Type Lease
    Lessor 2
    • 1. FV of asset > cost
    • 2. profit from mark-up immediately and interest revenue over time
  25. Sales-Type Lease
    journal entry 2 sale, asset
    guaranteed or unguaranteed
    • Sale (MLP)
    • Dr. Lease Receivable 
    • Cr. Sales Revenue
    • Asset (BV)
    • Dr. COGS 
    • Cr. Inventory
  26. Sale-Leaseback
    what is it?
    The sale of property to a customer (now the lessor) who leases it back to the seller (now the lessee).
  27. Sale-Leaseback
    Accounting rules
    • Lessor-normal rules applies
    • Lessee-records sale, but defers gain
    • (transaction has no substantial change)
  28. Sale-Leaseback
    Lessee
    Journal Entry-sale, leaseback
    • Sale
    • Dr. Cash
    • Cr. Asset, Unearned Revenue
    • Leaseback
    • Dr. Asset
    • Cr. Liability
  29. Sale-Leaseback
    Unearned Revenue
    Rules 3
    • 1. Capital lease-contra account to asset
    • 2. Operating lease-noncurrent unearned revenue
    • 3. Amortize along with depreciation in capital lease and lease term in operating lease
  30. Sale-Leaseback
    Unearned Revenue amortization
    journal entry
    • Dr. Unearned Revenue
    • Cr. Revenue or Depreciation Exp
  31. Operating Leases
    Renting an asset, not recorded in the books
  32. Leasehold Improvements
    • 1. Paid by Lessee.
    • 2. Capitalized in Leasehold Improvement acct
    • 3. Amortized over the shorter of the life of improvement or remaining lease term
    • 4. Include renewal option in lease term if probable
  33. Leasehold Improvements
    Journal Entry-improvement, amortization
    • Dr. 
    • Cr.
    • Dr.
    • Cr.
  34. Various Payments in an Operation Lease
    Types of payments examples 5
    • 1. Free rent
    • 2. uneven payments
    • 3. bonus
    • 4. closing cost
    • 5. finder's fees
  35. Rule for Various Payments
    Regardless of timing of payments, compute Rent Expense & Rent Revenue on S/L basis.
  36. Computation for Vaious Payments
    • Total Amount of all Rents
    • / Total lease term in years
    • = Rent Exp. or Rent Inc. per year
  37. Various Payments
    Payment doesnt = expense
    Lessor
    Difference results in Unearned Revenue or Rent Receivable
  38. Various Payments
    Payment doesn't = expense
    Lessee
    Difference results in Prepaid Rent or Rent Payable

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