ACC 312 Study Guide - Midterm Guide: Finance Lease, Operating Lease

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30 Nov 2017

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There are two types of leases, operating leases and finance leases. An operating lease is a rental agreement for an asset, which may be leased by one lessee for a period, and then another lessee for a period, and so on. The lease period is normally less than the economic life of the asset, and the lease rentals are charged as a cost in the profit and loss account as they o(cid:272)(cid:272)ur. The leased asset does not appear in the lessee s (cid:271)alan(cid:272)e sheet. The lessor is responsible for maintenance and regular service for assets like photocopiers, cars, and pcs. The lessor therefore retains most of the risk and reward of ownership. A finance lease relates to an asset where the present value of the lease rentals payable amounts to at least 90% of its fair market value at the start of the lease.

Related Questions

Lessee Santi contracts for three leases of three machines forsix months: lease A, lease B and Lease C. Each lease isnon-cancelable and each machine reverts to the lessor at the end ofthe lease term. The first rental payment for each machine is paidat the inception of the lease, with the balance to be paid in equalamounts at the start of each of five quarters thereafter. Thelessors agreed to pay the executory costs and included this amountin the lease rentals. For each of the machine the present value ofthe minimum lease payment is equal to 55% of the fair value of themachine. The following information is peculiar to each lease:

1. Lease A: it is agreed that at the time of the sixth payment,for an added bargain purchase option payment Lessee Santi can buythe property. The lease term is equal to 70% of the estimatedeconomic life of the asset.

2. Lease B: does not give the lessee the option to buy themachine. The lease term is equal to 90% of the estimated economiclife of the asset.

3. Lease C: does not give the lessee the option to buy themachine. The lease term is equal to 70% of the estimated economiclife of the asset.

Required:

1. How should Santi classify each of the three leases above, andwhy? Discuss the rationale for your answer.

2. What amount, if any, should Santi record as a liability atthe inception of the lease for each of the three leases above?

3. Assuming that the minimum lease payments are made on astraight-line basis, how should Santi record minimum lease paymentfor each of the three leases above?

Differentiate between an operating lease and a capital lease from the perspective of a lessee & a lessor under (FASB)?

What are the major differences in classification from the perspective of the new Standard?

What is meant by the term âsubstance over formâ as used in accounting for leases?

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.

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ACC 312 Study Guide - Midterm Guide: Finance Lease, Operating Lease

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