Chapter 15 - Part 2(4).pptx

Chapter 15 - Part 2(4).pptx - Chapter 15 Leases Part 2...

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Chapter 15: Leases Part 2
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Effect on the Lessee of a Residual Value Guaranteed Residual Value Sometimes the lease agreement includes a guarantee by the lessee that the lessor will recover a specified residual value when custody of the asset reverts back to the lessor at the end of the lease term. This not only reduces the lessor’s risk but also provides incentive for the lessee to exercise a higher degree of care in maintaining the leased asset to preserve the residual value. When the residual value is guaranteed, the lessor as well as the lessee views it as a component of minimum lease payments. The lessor uses the same amortization table as the lessee. Effect on the Lessor of a Residual Value
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Effect on the Lessee of a Residual Value Unguaranteed Residual Value A lease agreement may be silent as to the question of residual value. This is referred to as an unguaranteed residual value. In the case of unguaranteed residual value, the lessee is not obligated to make any payments other than the periodic rental payments. As a result, the present value of the minimum lease payments — recorded as a leased asset and a lease liability — is simply the present value of periodic rental payments. Effect on the Lessor of a Residual Value Even if it is not guaranteed, the lessor still expects to receive it. The lessor’s lease receivable will include the PV of the residual value.
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Treatment of Residual Value
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Executory Costs One of the responsibilities of ownership that is transferred to the lessee in a capital lease is the responsibility to pay for maintenance, insurance, taxes, and any other costs associated with ownership. These are referred to as executory costs . The lessee records executory costs as incurred. What would a lessee record for executory costs related to maintenance in the amount of $2,000?
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Lessor’s Initial Direct Costs Incremental costs incurred by the lessor in negotiating and consummating a lease agreement. Operating Leases − Capitalize and amortize over the lease term by the lessor.
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