Chapter15Slides

Chapter15Slides - Click to edit Master subtitle style ACCT...

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Unformatted text preview: Click to edit Master subtitle style 4/7/11 ACCT 4050 Leases Professor Dennis Chambers ACCT 4050 4/7/11 ACCT 4050 Understand accounting issues facing lessors and lessees Apply lease classification criteria Outline typical provisions found in lease contracts Learn the accounting for both capital and operating leases from the lessee and lessor perspective Prepare and interpret lease-related disclosures 4/7/11 ACCT 4050 2 Objectives 4/7/11 ACCT 4050 Lease Lease- a contract specifying the terms under which the owner of an asset agrees to transfer the right to use the asset to another party. 4/7/11 ACCT 4050 33 4/7/11 ACCT 4050 Parties Involved in a Lease Lessee- the party granted the right to use the property under the terms of a lease. Lessor- The owner of the property that is rented (leased) to another party. 4/7/11 ACCT 4050 44 4/7/11 ACCT 4050 4/7/11 ACCT 4050 55 Key Provisions of Leases Cancellation Provision Specifies under what circumstances the lease may be canceled. Lease Term Delineates the time period the lease is to be in force. Bargain Purchase Option Grants lessee the right to purchase the asset at the end of the lease term for less than the residual value. Residual Value Market value of leased asset at end of lease term. Rental payment required over lease term (paid at beginning of period) plus any payment for residual value Minimum Lease Payments 4/7/11 ACCT 4050 Is a lease, in substance, a purchase of the asset rather than a temporary rental? ◦ More generally…Have the risks and rights of ownership passed to the lessee? We look at the terms of the lease contract 4/7/11 ACCT 4050 6 Key Accounting Issue 4/7/11 ACCT 4050 Two Kinds of Leases Capital Leases Operating Leases Capital leases are Operating leases are 4/7/11 ACCT 4050 7 4/7/11 ACCT 4050 1. The lease transfers ownership of the leased asset to the lessee by the end of the lease term. 2. The lease contains an option allowing the lessee to purchase the asset at the end of the lease term at a bargain price . 3. The lease term is equal to 75% or more of the estimated economic life of the asset. 4. The present value of the lease payments at the beginning of the lease is 90% or more of the fair market 4/7/11 ACCT 4050 8 Lease Classification Criteria A lease is classified as a capital lease by the lessee if it is non- cancelable and meets any one of the following criteria: 4/7/11 ACCT 4050 4/7/11 ACCT 4050 9 Lease Classification Criteria Transfer of Ownership?...
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Chapter15Slides - Click to edit Master subtitle style ACCT...

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