Chapter 15 HW-Part II

Chapter 15 hw part ii

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Unformatted text preview: Chapter 15 Question 15-11 Leases Contingent rentals are not included in minimum lease payments but are reported in disclosure notes by both the lessor and lessee. This is because they are not determinable at the inception of the lease. They are included as components of income when (and if) the payments occur. However, increases or decreases in lease payments that are dependent only upon the passage of time are not contingent rentals; these are part of minimum lease payments. Question 15-13 In an operating lease initial direct costs are recorded as prepaid expenses (assets) and amortized as an operating expense (usually straight-line) over the lease term. This approach is due to the nature of operating leases in which rental revenue is earned over the lease term. Initial direct costs are matched, along with depreciation and other associated costs, with the rent revenues they help generate. In a direct financing lease initial direct costs are amortized over the lease term. This is accomplished by offsetting lease receivable by the initial direct costs. This recognizes the initial direct costs at the same rate (that is, proportionally), as the interest revenue to which it is related. The nature of the lease motivates this treatment. The only revenue a direct financing lease generates for the lessor is interest revenue, which is earned over the lease term. So initial direct costs are matched proportionally over the term of the lease. In a sales-type lease, GAAP requires that initial direct costs be expensed in the period of "sale" that is, at the inception of the lease. This treatment implicitly assumes that in a salestype lease the primary reason for incurring these costs is to facilitate the sale of the leased asset. Question 15-14 On the surface there are two separate transactions. But the seller/lessee still retains the use of the asset that it had prior to the sale-leaseback. In reality the seller/lessee has cash from the sale and a noncancelable obligation to repay a debt. In substance, the seller/lessee simply has borrowed cash to be repaid with interest over the lease...
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This note was uploaded on 05/08/2010 for the course ACCTG 322 taught by Professor Gill during the Spring '08 term at San Diego State.

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