chapter21

chapter21 - Basics of Leasing Accounting for Leases Chapter...

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Slide 21-1 Bob Anderson- UCSB Accounting for Leases Chapter 21 Slide 21-2 Bob Anderson- UCSB 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 in return for stipulated, and generally periodic, cash payments (rents). . Basics of Leasing Lease term Lease Contract Rental payments Executory Costs Restrictions Noncancelable Early termination Default Slide 21-3 Bob Anderson- UCSB Advantages of Leasing 100% Financing at Fixed Rates Protection against Obsolescence Flexibility Less Costly Financing Alternative Minimum Tax Problems Off-Balance Sheet-Financing Slide 21-4 Bob Anderson- UCSB Accounting by Lessee Operating Lease Capital Lease Journal Entry: Rent expense xxx Cash xxx Journal Entry: Leased equipment xxx Lease obligation xxx The issue of how to report leases is the case of substance versus form. Although technically legal title does not pass in lease transactions, the benefits from the use of the property do. Statement of Financial Accounting Standard No. 13, “Accounting for Leases,” 1980 A lease that transfers substantially all of the benefits and risks of property ownership should be capitalized (only noncancellable leases may be capitalized).
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Slide 21-5 Bob Anderson- UCSB Mechanics The expense recorded on a capital lease and an operating lease are THE SAME over the life of the asset. In a capital lease it hits the P&L via interest expense and depreciation expense VS operating, it all goes into rent expense. In a capital lease, think of it as a sale. The commitment to the lessor is a debt and should be treated like any other debt (current vs. noncurrent, accrue interest etc.) The asset gets depreciated just like if it were owned/purchased. Slide 21-6 Bob Anderson- UCSB Compare capital vs. operating lease FACTS Lease a computer worth 3,000 Lease term 3 yrs Annual payment 1,143 Estimated life of a computer 4 yrs Effective borrowing rate 7% PRESENT VALUE OF PAYMENTS $3,000 ANNUAL DEPRECIATION $750 CAPITAL LEASE Equipment 3,000 Cap lease obligation 3,000 Cash 1,143 1,143 1,143 Interest expense 210 145 75 0 Capital lease obligation 933 998 1,068 (0) Depreciation expense 750 750 750 750 Accumulated depreciation 750 750 750 750 OPERATING LEASE Rent expense NO OPENING ENTRY! 1,143 1,143 1,143 Cash 1,143 1,143 1,143 COMPARE EXPENSE OF THE TWO: CAPITAL LEASE OPERATING LEASE Interest expense 429 Rent expense 3,429 Depreciation expense 3,000 3,429 DIFFERENCE BETWEEN THE TWO OVERALL: NONE!!!! OPENING YEAR ONE YEAR TWO YEAR THREE YEAR FOUR Slide 21-7 Bob Anderson- UCSB Capitalization Criteria Transfer of Ownership Bargain Purchase Lease Term >= 75% PV of Payments >= 90% O p e r a t i n g L e a s e No No No No Yes Capital Lease Lease Agreement Yes Yes Yes Leases that DO NOT meet any of the four criteria are accounted for as Operating Leases Slide 21-8
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chapter21 - Basics of Leasing Accounting for Leases Chapter...

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