If the inception of the lease occurs during the last

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Unformatted text preview: of the lease occurs during the last 25% of an asset’s economic life, this criterion does not apply. Chapter 15-9 Accounting by the Lessee Lease Agreement Leases that DO NOT meet any of the four criteria are accounted for as Operating Leases. No No Lease Term >= 75% PV of Payments >= 90% No Transfer of Ownership Bargain Purchase No O p e r a t in g L e a s e Yes Yes Yes Yes Capital Lease Chapter 15-10 Operating Leases This is treated as a rental. Be sure to remember that expense recognition has nothing to do with cash payments Rental Journal Entry: Rent expense Cash xxx xxx Chapter 15-11 OPERATING LEASES On January 1, 2009, Sans Serif Publishers, Inc., leased a color copier from CompuDec Corporation. 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 15-12 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 15-13 Operating Lease At each of the Four Payments Date Description Debit Credit Prepaid rent Cash 100,000 100,000 At the end of each Year Description Debit Credit Rent Expense Prepaid Rent 100,000 100,000 Chapter 15-14 OPERATING LEASES On January 1, 2009, Sans Serif Publishers, Inc., leased a color copier from CompuDec Corporation. The lease agreement specifies two bi-annual payments of $200,000 on December 31, 2010 and 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 15-15 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? {$301,892 < 90% of $479,079} ($200,000 x .82645) + ($200,000 x .68301) = $301,892 ** present value of 2 single payments Since none of the four classification criteria is met, this is an operating lease. Chapter 15-16 Operating Leas...
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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.

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