Chapter_21_Notes

Chapter_21_Notes - Chapter 21 Notes Accounting for Leases A...

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Unformatted text preview: Chapter 21 Notes Accounting for Leases A lease is a contractual agreement between a lessor (owner of the property) and a lessee (user of leased property). Leases have turned into big business with banks taking the lead. Banks have low-cost funds, so they can buy assets and lease them out. Lease Advantages (Lessee): 1. 100% Financing at Fixed Rates no down payment and interest rate is non-variable 2. Protection Against Obsolescence 3. Flexibility tailored to meet specific needs 4. Less Costly Financing 5. Tax Advantages 6. Off-Balance-Sheet Financing Two types of leases for Lessee: 1. Operating: Lessee assigns rent (expense) to the periods benefiting from use of the asset and ignores any obligation to make future payments. Lessor recognizes rental revenue and depreciates asset. 2. Capital: Lessee records an asset and a liability equal to the present value of the rental payments. Lessor recognizes a sale of the asset by removing the asset from the balance sheet and replacing it with a receivable (Lease Rec.). Chapter 21 Notes 1 Operating Leases Lessee Entry for each rental payment: Rent Expense XX Cash XX Operating Leases Lessor Entry for each rental receipt: Cash XX Rent Revenue XX Periodic adjusting entry: Depreciation Expense XX Accum. Depreciation XX Expense maintenance costs, insurance, property taxes, etc. Chapter 21 Notes 2 Capital Leases To be classified as a capital lease, the lease must be noncancelable and meet one of the following criteria: 1. Ownership transfers to lessee at end of term 2. Contains a bargain purchase option (BPO) 3. Term is equal to 75% or more of the assets economic life 4. PV of minimum leases payments >= 90% of the FMV of the asset Additional revenue recognition criteria applicable to lessors : 1. Collectibility of the minimum lease payments is reasonably predictable. 2. Substantial completion of performance. No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor. Record the asset/liability at the lower of: 1. PV of minimum lease payments (excluding executory costs) 2. FMV of leased asset Chapter 21 Notes 3 Lease Vocabulary Lease Term Minimum Lease Payments Bargain Purchase Option Bargain Renewal Option Residual Value (RV) Guaranteed RV Executory Costs Implicit Interest Rate Incremental Borrowing Rate Chapter 21 Notes 4 Capital Leases Lessee Assume Marshall Corp. leases equipment from Universal Leasing Co. with the following terms....
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This note was uploaded on 02/25/2011 for the course ACCT 3021 taught by Professor Delaune during the Fall '06 term at LSU.

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Chapter_21_Notes - Chapter 21 Notes Accounting for Leases A...

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