302Chapter 15 notes

302Chapter 15 notes - CHAPTER 15 A Accounting for Leases A...

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C HAPTER 15 A Accounting for Leases A L EARNING O BJECTIVES 1. Describe the circumstances in which leasing makes more business sense than does an outright sale and purchase. C Primary advantages to a lessee of leasing over purchasing: < A lease often involves no down payment, < Leasing avoids the risks of ownership, and < Leasing gives the lessee flexibility to change assets when technology or preferences change. C Economic advantages to a lessor: < An increase in sales by providing financing to customers who might not otherwise be able to buy, < Establishment of an ongoing relationship with customers, and < Retention of the residual value of the leased asset after the lease term is over. 2. Understand the accounting issues faced by the asset owner (lessor) and the asset user (lessee) in recording a lease transaction. C For the lessor, the key issue is whether or not a sale should be recognized on the date the lease is signed. This hinges on the following factors: < Whether the lease signing transfers effective ownership of the leased asset, < Whether the lessor has any significant additional responsibilities remaining after the lease is signed, and < Whether payment collectibility is reasonably assured. C For the lessee, the key issue is whether the leased asset and the lease payment obligation should be recognized on the balance sheet. C This hinges on whether the lease signing transfers effective ownership of the leased asset. C Capital leases are accounted for as if the lease agreement transfers ownership of the leased asset from the lessor to the lessee. C Operating leases are accounted for as rental agreements. 3. Outline the types of contractual provisions typically included in lease agreements. 1
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C Cancellation provisions . < A noncancelable lease agreement—a lease that can be canceled by the lessee only under very unusual circumstances. < Only noncancelable leases can be classified as capital leases. C Bargain purchase option —If the lessee has the option to purchase the leased asset in the future at an amount low enough that the exercise of the option is likely, a bargain purchase option exists. C Lease term —includes the noncancelable lease period, plus any periods covered by bargain renewal options that include favorable lease terms (e.g., low lease payment) that make it likely that the lessee will renew the lease. C Residual value. < The value of the leased asset at the end of the lease term. < Sometimes, the lease agreement requires that the lessee guarantee the residual value—if the residual value falls below the guaranteed amount, the lessee must pay the lessor the difference. C Minimum lease payments . < Include the periodic lease payments plus any bargain purchase option or the amount of any guaranteed residual value. < The lessor computes the present value of the minimum
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302Chapter 15 notes - CHAPTER 15 A Accounting for Leases A...

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