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2009 F-5 Class Notes

2009 F-5 Class Notes - Becker CPA Review Financial 5 Class...

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Becker CPA Review – Financial 5 Class Notes 1 © 2009 DeVry/Becker Educational Development Corp. All rights reserved. FINANCIAL 5 CLASS NOTES Financial 5 includes the following: I. ACCOUNTING FOR OPERATING LEASES A. Operating leases are essentially ‘rentals’ and all cash flows have to be straight-lined over the lease period as the periodic expense to the lessee and as lease revenue to the lessor (matching principle). Cash payments intended to be returned to the lessee are excluded from the expense/revenue calculation and are treated as deposits. B. Leasehold improvements by a lessee must be expensed over the shorter of the remaining lease term or the life of the improvement. II. CAPITAL LEASES AND LESSEES A. Lessees account for capital leases as though purchased if one or more of 4 (OWNS) tests is met: 1. O wnership transfers to lessee at end of lease 2. W ritten bargain purchase option exists [PO<estimated fair value] 3. N inety percent of the leased property’s fair value is less than or equal to the present value of the minimum lease payments 4. S eventy-five percent of the asset’s economic life will be consumed in the lease term. B. Lessees record the capital leased asset and the lease liability at the present value of the minimum lease payments, not to exceed fair value of asset. C. Minimum lease payments include the required periodic payments and the bargain purchase and/or guaranteed residual value (if any). Executory costs (maintenance, insurance, taxes, etc.) are excluded. D. The interest rate used is the lesser of the rate implicit in the lease (if known) or the lessee’s incremental borrowing rate. The lease liability is amortized using the effective interest method . E. Depreciation is based on the lease term unless the lease has a bargain purchase option or ownership transfers to lessee at end of the term.
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