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Fin ch15

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Unformatted text preview: Accounting for Leases Chapter 15 Chapter 15-1 Accounting for Leases Leasing Environment Definition of Lease Advantages of leasing Accounting by Lessee Overview of accounting options Capitalization criteria Operating Leases Capital Leases Lessee Disclosures Accounting by Lessor Overview of Accounting Options Classification Criteria Operating leases Sales-type Leases Direct Financing Initial Direct Costs Lessor Disclosures Special Accounting Problems Statement of Cash Flow Impact Contingent rentals Sales Leaseback Real Estate Leases Leveraged Leases Chapter 15-2 The Leasing Environment A lease is a contractual agreement between a lessor and a lessee, that gives the lessee the right to use specific property, owned by the lessor, for a specified period of time. Chapter 15-3 The Leasing Environment Advantages of Leasing 1. 100% Financing at Fixed Rates. 2. Protection Against Obsolescence. 3. Flexibility (fewer covenants). 4. Less Costly Financing. 5. Tax Advantages (synthetic leases). 6. Off-Balance-Sheet Financing. A synthetic lease is an operating lease that retains tax benefits of ownership. Chapter 15-4 Accounting by the Lessee From the Lessee's perspective, the issue is whether the lease contract should be treated as a rental or a purchase of the leased asset. Rental Purchase Journal Entry: Leased equipment Lease obligation xxx xxx Journal Entry: Rent expense Cash xxx xxx Chapter 15-5 Accounting by the Lessee The Accounting treatment impact several financial ratios 2. Debt to equity ratio – Lease liabilities are recorded. 3. Rate of return on assets – Lease assets are recorded. Whether leases are capitalized or treated as an operating lease affects the income statement and balance sheet. The greater impact is on the balance sheet. Chapter 15-6 Accounting by the Lessee General Rule Capitalize a lease that transfers substantially all of the benefits and risks of property ownership, provided the lease is noncancelable. Leases that do not transfer substantially all the benefits and risks of ownership are operating leases. The issue of how to report leases is the case of substance versus form. Although technically legal title may not pass, the benefits from the use of the property do. Chapter 15-7 Accounting by the Lessee To record a lease as a capital lease, the lease must be noncancelable. One or more of four criteria must be met: 1. Transfers ownership to the lessee. 2. Contains a bargain purchase option. 3. Lease term is equal to or greater than 75 percent of the estimated economic life of the leased property. (excluding executory costs) equals or exceeds 90 percent of the fair value of the leased property. 4. The present value of the minimum lease payments Chapter 15-8 Classification Criteria A bargain purchase option (BPO) gives the lessee the right to purchase the leased asset at a price significantly lower than the expected fair value of the property and the exercise of the option appears reasonably assured. The lease term is normally considered to be the noncancelable term of the lease plus any periods covered by bargain renewal options. If the inception...
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