3 high residual value chapter 15 51 accounting by the

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: s accounting depends on whether •It is a rental of an asset, or •It is a joint sale and financing of an asset, or •It is a financing of an asset •Accounting for Rental is straightforward •Sale and Financing must account for Gross Profit and Finance Income. We must also worry about Revenue Recognition •Financing only grapples with finance income Chapter 15-52 Accounting by the Lessor Classification of Leases by the Lessor a. Operating leases (rental). b. Sales-type leases (sale and financing). c. Direct-financing leases (financing only) A sales-type lease involves a manufacturer’s or dealer’s profit, and a direct-financing lease does not. Chapter 15-53 Accounting by the Lessor Classification of Leases by the Lessor Group II criteria ensures proper revenue recognition. A lessor may classify a lease as an operating lease but the lessee may classify the same lease as a capital lease Chapter 15-54 Accounting by the Lessor Operating Method (Lessor) Records each rental receipt as rental revenue. Depreciates the leased asset in the normal manner. Chapter 15-55 OPERATING LEASES On January 1, 2009, Compudec Corporation leased a color copier to San Serif publishers. The lease agreement specifies four annual payments of $100,000 beginning January 1, 2009, the inception of the lease, and at each January 1 through 2012. The useful life of the copier is estimated to be six years. Sans Serif considered purchasing the copier for its cash price of $479,079. If funds were borrowed to buy the copier the interest rate would have been 10%. How should this lease be classified? Chapter 15-56 OPERATING LEASES Does the agreement specify that ownership of the asset transfers to the lessee? NO Does the agreement contain a bargain purchase option? NO Is the lease term equal to 75% or more of the expected economic life of the asset? NO {4 yrs < 75% of 6 yrs} Is the present value of the minimum lease payments equal to or greater than 90% NO of the fair value of the asset? {$348,685 < 90% of $479,079} $100,000 x 3.48685** = $348,685 ** present value of an annuity due of $1: n=4, i=10% Since none of the four classification criteria is met, this is an operating lease. Chapter 15-57 Operating Lease At each of the Four Payments Date Description Debit Credit Cash Unearned Rent Revenue 100,000 100,000 At the end of each Year Description Debit Credit Rent Revenue Unearned Rent Revenue 100,000 100,000 •Lessor will also depreciate the asset as discussed in chapter Chapter 15-58 10 Accounting by the Lessor Classification of Leases by the Lessor Chapter 15-59 Sales Type Lease versus Direct Financing In the Sales Type Lease the cost of the asset is not equal to its fair value In the Direct Financing the cost of the asset is equal to its fair value • In substance the direct financing of an asset purchase by the lessee. Chapter 15-60 Sales Type versus Direct Financing • Primary difference between a direct-financing lease and a salestype lease is the manufacturer’s or dealer’s gross profit (or loss). In sales type lease, the lessor records the sale price of...
View Full Document

This note was uploaded on 04/08/2009 for the course ACG 3482C taught by Professor Tinaker during the Spring '09 term at University of Florida.

Ask a homework question - tutors are online