Accounting by the lessee depreciation of asset

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Unformatted text preview: tion of Asset Depreciation Period • If lease transfers ownership, depreciate asset over the economic life of the asset. If lease does not transfer ownership, depreciate over the term of the lease. • Chapter 15-26 Accounting by the Lessee Depreciation of Asset Depreciation Period • If lease does not transfer ownership, depreciate over the term of the lease. The lease term is normally considered to be the noncancelable term of the lease plus any periods covered by bargain renewal options. Chapter 15-27 Lessee accounting for Residual Value Residual Value for Depreciation • The residual value of a leased asset is an estimate of what its commercial value will be at the end of the lease term. We need to determine the proper accounting for residual value by the lessee. • Chapter 15-28 Lessee Accounting for Residual Value If title transfer to lessee Lessee reduces asset by this amount for depreciation purposes over useful life If Asset reverts to Lessor, the accounting is determined by whether the residual value is Unguaranteed by Lessee or Guaranteed by Lessee Chapter 15-29 Residual Value Guaranteed by Lessee • The lessee reduces the cost basis of the asset by the guaranteed residual value to calculate depreciation expense over lease term. • If at the end of the lease term the appraised value of the asset is less than guaranteed amount, the lessee must pay the difference between appraised value and guaranteed residual value to the lessor. Chapter 15-30 Residual Value is Unguaranteed by Lessee • The lessee does not use this residual value in determining depreciation over the useful life of the asset • This is a residual value that is of no consequence to the lessee and is also not part of the Lessee’s minimum lease payments Chapter 15-31 Lesse Residual Value Lease Guarantees Classification to Lessor Title Lease N/A Dep Base Dep Period PV of MLP – Over Useful Residual life Value PV of MLP – Over Lease GRV Term PV of MLP – Over lease 0 term Non Titled Lease GRV UGRV Chapter 15-32 Accounting by the Lessee (Capital Lease with Unguaranteed Residual Value) On January 1, 2007, Burke Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Burke to make annual payments of $8,668 at the beginning of each year, starting January 1, 2007. The machine has an estimated useful life of 6 years and a $5,000 unguaranteed residual value. Burke uses the straight-line method of depreciation for all of its plant assets. Burke’s incremental borrowing rate is 10%, and the Lessor’s implicit rate is unknown. Instructions (a) What type of lease is this? Explain. (b) Compute the present value of the minimum lease payments. (c) Prepare all journal entries for Burke through Jan. 1, 2008. Chapter 15-33 Accounting by the Lessee What type of lease is this? Explain. Capitalization Criteria: 2. Transfer of ownership 3. Bargain purchase option 4. Lease term => 75% of Capital Lease, #3 NO NO Lease term 5 yrs. Economic l...
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