Leases
Capital Lease (Lessee)
Risk of ownership passes with (must meet one)
Title
Bargain Purchase Option (BPO)
Substance
75% Test
Lease term > 75% Useful life
90% Test
PV of minimum lease payments > 90% Fair Value
Capitalize at Cost
Asset and Liability Recorded
PV of Future Lease Payments
Discount Rate (Lessor of)
Implicit Rate of Lease
Market Rate
Footnotes
Future minimum rental commitments
By Year for 5 years with all remaining years grouped together
Journal Entry (Lease payments)
Dr. Interest Expense
Cr. Cash or Lease Payable
Paying interest expense on Lease
Capital Lease (Lessor)
Requirements (Lessee must meet one)
Predictable collection of lease payments
No uncertainties if lessor reimburse lessee for cost incurred before payment
Journal Entry (Initial Lease)
Dr. Lease Receivable
Cr. Assets
Cr. Unearned income
Journal Entry (Lease payments)
Dr. Cash
Cr. Lease Receivable
Dr. Unearned Income
Cr. Interest Income
Cash received offsets the receivable previously booked
Unearned Income is slowly turned into interest income
Create a receivable, moving the asset under lease out, and booking any unearned income for the interest to be received from the lease payments
Operating Lease (Lessor)
Operating Lease (Lessee)
No Risk of Ownership
No Asset or Liabilities recorded in F/S
Leasehold improvements
Capitalized and depreciated over the lessor of Lease Life or Improvement life
Journal Entry (Lease Payments)
Dr. Rent Expense
Cr. Cash or Rent Payable
Not interest expense, it is just renting an asset
Rent Revenue recorded
Remains an asset and just depreciated
Journal Entry (Lease Payments)
Dr. Cash or Receivable
Cr. Rent Revenue
If fluctuating payments
Rent revenue is recognized on a S/L basis
Year 1: 4k
Year 2-5: 12.5k
Rent Revenue per year = 10.8k
(12.5k+4k)/4
Direct Financing Lease
Interest Revenue decreases as time passes
Principal amount increases with each payment
Carrying amount of Lease decreases
Sale-Leaseback
Profit on sale is deferred and amortized
Exception to being deferred amortized
PV of Lease payments is 10% or less of asset's FMV
PV of Lease payments is greater than 10% of FMV AND is an operating lease
Recognize GAIN instead
Recognize the gain net of PV of lease payments
100k gain, 25k PV of Lease Payments
75k is gain
25k is also gain, but is deferred
Lease Payments
Annuity Due
Payment begin at start of lease
Think: Rent is Due at the first of the month
Ordinary Annuity
Payments begin after the end of the first year
Think: An annuity is annual, and will pay at end of year