Chapter 15 16 operating lease at end of year accrue

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Unformatted text preview: e At end of year accrue rent on Straight Line Basis Description Debit Credit Rent expense Rent Payable 100,000 100,000 On Bi-annual Payment date Description Debit Credit Rent Expense Rent payable Cash Chapter 15-17 100,000 100,000 200,000 Operating Leases LEASEHOLD IMPROVEMENTS Sometimes a lessee will make improvements to leased property that reverts back to the lessor at the end of the lease. If a lessee constructs a new building on or makes modifications to existing structures, that cost represents an asset just like any other capital expenditure. Like other assets, its cost is allocated as depreciation expense over its useful life to the lessee, which will be the shorter of the physical life of the asset or the lease term. Chapter 15-18 Capital Leases This is treated as an acquisition of asset financed by an installment obligation. Purchase Journal Entry: Leased equipment Lease obligation xxx xxx Issues: • how to measure the asset and liability • how to get rid of the liability • how to depreciate the asset (useful life or lease term, residual value whether guaranteed or unguaranteed). Chapter 15-19 Capital Leases If the lessee capitalizes a lease, the lessee records an asset and a liability generally equal to the present value of the minimum lease payments. What are the minimum lease payments? What is the discount rate to use? Chapter 15-20 Capital Leases Minimum Lease Payments Minimum lease payments: Rental payment Bargain purchase option Penalty for failure to renew Guaranteed residual value Insurance Maintenance Taxes Exclude from PV of Minimum Lease Payment calculation Executory Costs: Chapter 15-21 Capital Lease •Rental payments --- always in the game •BPO --- sometimes in the game but never with GRV •The guaranteed residual value is the amount that the lessee agrees the leased asset will be worth at the end of the lease. •If the asset is worth less than this amount, the lessee must pay the difference between the guaranteed residual value and the actual value of the asset at the end of the lease. •GRV -- sometimes in the game but never with BPO Chapter 15-22 Accounting by the Lessee Discount Rate Lessee computes the present value of the minimum lease payments using its incremental borrowing rate, with one exception. If the lessee knows the implicit interest rate computed by the lessor and it is less than the lessee’s incremental borrowing rate, then lessee must use the lessor’s rate. Chapter 15-23 Accounting by the Lessee Asset should never exceed Fair Value (Cost principle) Asset and Liability Recorded at the lower of: 1. the present value of the minimum lease payments (excluding executory costs) or 2. the fair-market value of the leased asset. Chapter 15-24 Capital Leases Purchase Journal Entry: Leased equipment Lease obligation xxx xxx The liability and Asset are removed from the books for different reasons and through different mechanism Liability goes away with payments. Treat the lease payments as consisting of interest and principal reduction Chapter 15-25 The asset is removed via depreciation. Accounting by the Lessee Deprecia...
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