15 Ch. 15 - Leases - Leases Chapter 15 1 Learning...

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Leases Chapter 15 1
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2 Learning Objectives – Leases 1. Identify and describe the operational, financial, and tax objectives that motivate leasing. 2. Explain why some leases constitute lease agreements and some represent purchases/sales accompanied by debt financing. 3. Explain the basis for each of the criteria and conditions used to classify leases. 4. Record all transactions associated with operating leases by both the lessor and lessee. 5. Describe and demonstrate how both the lessee and lessor account for a nonoperating lease. 6. Describe and demonstrate how the lessor accounts for a sales-type lease. 7. Explain how lease accounting is affected by the residual value of a leased asset. 8. Describe the way a bargain purchase option affects lease accounting. 9. Explain the impact on lease accounting of executory costs, the discount rate, initial direct costs, and contingent leases. 10. Explain sale-leaseback agreements and other special leasing arrangements and their accounting treatment.
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Largest group of leased equipment involves Information technology, Transportation (trucks, aircraft, rail), Construction and Agriculture. A lease is a contractual agreement where the lessor conveys the right to use property, plant, or equipment, usually for a stated period of time, to the lessee . The Players Three general categories: Lessor Lessee Banks Captive leasing companies Independents Leasing Environment 3 Conceptual Nature of a Lease Lessee = User or Renter Lessor = Owner of property Operating lease – Rental agreement – rent expense Capital lease – A means for purchasing the asset Operating Lease – rent revenue Direct financing lease Sales-type lease Lease Classifications Capital lease - a lease that transfers substantially all of the benefits and risks of property ownership, provided the lease is noncancelable. Operating lease - leases that do not transfer substantially all the benefits and risks of ownership.
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1. 100% Financing at Fixed Rates. 2. Protection Against Obsolescence. 3. Flexibility. 4. Less Costly Financing. 5. Tax Advantages. 6. Off-Balance-Sheet Financing. Advantages of Leasing Leasing Environment 4
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Lessee = Rent Expense = Accrual Accounting Bonus = Prepaid Rent – straight-line over lease term to rent expense. Nonrefundable deposits are recorded as an asset and amortized to an expense account over the life of the lease. Refundable deposits are set up as a receivable (asset) and NOT amortized. Uneven rental payments are expensed evenly Leasehold improvements made by lessee are capitalized and amortized over the useful life to the lessee. Must use the shorter of the useful life to the lessee or the life of the leasehold improvement. Initial direct costs like finder fees are recorded as an asset and amortized to expense
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15 Ch. 15 - Leases - Leases Chapter 15 1 Learning...

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