Class7-Leases1

Class7-Leases1 - M351 Notes Class 7 Leases pages 1087-1107...

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M351 Notes, Class 7: Leases, pages 1087-1107 Today’s topics What is a lease? Is this transaction similar to the purchase of an asset financed by a mortgage (capital lease) or the transaction similar to an “executor” contract (operating lease)? (Recall from chapter 3: that signing a contract does not necessarily mean that journal entries are needed). How can we decide between these alternatives? For a capital lease, can we setup the table as we did in chapter 14 to see how the present value of the lease payments changes over time? This will be necessary for lessee accounting (interest expense on the lease obligation) and for the lessor (interest revenue on lease receivable). A. What has to be true for point #2 on page 1090 to produce an advantage for the lessee? B. There are two kinds of leases: capital and operating C. Lease capitalization criteria (meet any one and a non-cancelable lease must be accounted for as a capital lease for the lessee): 1. Lease transfers ownership of the property to the lessee 2. Lease contains a bargain purchase option 3. Lease term is greater than or equal to 75% of the economic life of the leased property (An original lease term plus a bargain renewal option can create a lease term that exceeds the 75% of economic life) 4. The present value of the minimum lease payments is greater than or equal to 90% of the fair value of the leased property (lease executory costs paid by the lessee are excluded from the minimum lease payments for the 90% fair value test). D.
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Class7-Leases1 - M351 Notes Class 7 Leases pages 1087-1107...

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