ACTG 2010 Lecture Notes - Lecture 2: Finance Lease, Operating Lease

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whiteshark880

15 Oct 2017

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Types of leases: operating lease will record the lease transactions as, dr. Cash: capital (aspe)/ finance (ifrs) lease, recorded in the books as an asset at the pv of minimum lease payments, annual depreciation expense and interest expense. A lease will be deemed capital if one of the conditions are met: Ifrs: there is reasonable assurance that the lessee will obtain ownership of the leased asset by the end of the lease term. (cid:862)o(cid:449)nership is transferred at end or bargain pur(cid:272)hase option (bpo) available. Aspe: the lease term is equal to a major portion (usually 75% or more) of the economic life of the leased property. Ifrs: the lease term is for the major part of the economic life of the asset even if title is not transferred. Ifrs: at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset;

Related Questions

Choose the correct answer

32. An essential element of a lease isthat the

a. lessor conveys less than his or her totalinterest in the property.

b. lessee provides a sinking fund equal to oneyearâs lease payments.

c. property that is the subject of the leaseagreement must be held for sale by the lessor prior to the draftingof the lease agreement.

d. term of the lease is substantially equal to theeconomic life of the leased property.

33. What impact does a bargainpurchase option have on the present value of the minimum leasepayments computed by the lessee?

a. There is no impact as the option does not enterinto the transaction until the end of the lease term.

b. The lessee must increase the present value of theminimum lease payments by the present value of the optionprice.

c. The lessee must decrease the present value of theminimum lease payments by the present value of the optionprice.

d. The minimum lease payments would be increased bythe present value of the option price if, at the time of the leaseagreement, it appeared certain that the lessee would exercise theoption at the end of the lease and purchase the asset at the optionprice.

34. The methods of accounting for alease by the lessee are

a. operating and capital lease methods.

b. operating, sales, and capital lease methods.

c. operating and leveraged lease methods.

d. None of these answers are correct.

35. Which of the following is a correct statement of one of thecapitalization criteria?

a. The lease transfers ownership of the property tothe lessor.

b. The lease contains a purchase option.

c. The lease term is equal to or more than 75% ofthe estimated economic life of the leased property.

d. The minimum lease payments (excluding executorycosts) equal or exceed 90% of the fair value of the leasedproperty.

whitewolf712

For each of the three independent situations below determine the amount of the annual lease payments. Each describes a capital lease in which annual lease payments are payable at the beginning of each year. Each lease agreement contains an option that permits the lessee to acquire the leased asset at an option price that is sufficiently lower than the expected fair value that the exercise of the option appears reasonably certain. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Situation

	1			2			3
Lease term (years)		5			15			4
Lessorâs rate of return		10	%		11	%		9	%
Fair value of leased asset	$	90,000		$	435,000		$	200,000
Lessorâs cost of leased asset	$	65,000		$	435,000		$	160,000
Bargain purchase option:
Option price	$	25,000		$	65,000		$	37,000
Exercisable at end of year:		5			5			3

carminelizard500

Pharoah Company leases a building to Walsh, Inc. on January 1, 2017. The following facts pertain to the lease agreement.

1.		The lease term is 5 years, with equal annual rental payments of $3,587 at the beginning of each year.
2.		Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature.
3.		The building has a fair value of $16,800, a book value to Pharoah of $9,800, and a useful life of 6 years.
4.		At the end of the lease term, Pharoah and Walsh expect there to be an unguaranteed residual value of $2,450.
5.		Pharoah wants to earn a return of 9% on the lease, and collectibility of the payments is probable. This rate is known by Walsh.

Using the original facts of the lease, show the journal entries to be made by both Pharoah and Walsh in 2017.

harlequinseal880

ACTG 2010 Lecture Notes - Lecture 2: Finance Lease, Operating Lease

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