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Unformatted text preview: Chapter 15: Leases (Intermediate Accounting 10e Stice) Advantages to Leasing: Lessee: Lessor: 1. No down payment 1. Increased sales 2. Avoid risks of ownership 2. Ongoing business relationship w/ lessee 3. Flexibility 3. Residual value retained Contractual Terms/Provisions that determine whether or not a lease transfers ownership: 1. Cancellation Provisions Non-cancelable: only cancelable under remote circumstances or at greats cost; cancellation not likely. All cancelable leases are accounted for as operating leases. 2. Bargain Purchase Option If the lease gives the lessee the right to purchase the leased property (at some future date) at a price that is significantly less than the FMV at the date the purchase option may be purchased, a bargain purchase option exists. To evaluate whether a bargain purchase options exists, the lease parties must be able to reasonably estimate FMV of the leased property at the end of the lease (the propertys residual value). A bargain purchase option is so favorable that it is expected to be exercised; a transfer of ownership is probable. Non-cancelable leases with bargain purchase options are accounted for as capital leases. 3. Lease Term The period of time from the beginning of the lease (when the lessee takes possession of the leased property) to the end of the lease (the end of the fixed non-cancelable lease period plus all renewal option periods that are likely to be exercised). Chapter 15: Leases (Intermediate Accounting 10e Stice) If the lease contract includes a bargain purchase, the lease term includes any renewal periods prior to the date of the bargain purchase option, but not beyond that date. 4. Residual Value The residual value of the leased property is the market value of the leased property at the end of the lease term. Guaranteed residual value requires the lessee to pay the difference if the market value of the leased property falls below a specified residual value; the residual value risk is borne by the lessee. If the market value of the leased property differs from the estimated residual value at the inception of the lease and the residual value is not guaranteed, then the lease is said to have an unguaranteed residual value. The residual value risk for unguaranteed residual value is borne by the lessor. If there is no bargain purchase option or guarantee of residual value; the lessor takes possession of the leased property at the end of the lease term and may: 1) offer to renew the lease, 2) lease the asset to another lessee, or 3) sell the property. 5. Minimum Lease Payments Minimum lease payments: the rental payments over the term of the lease plus any amount to be paid for the residual value( either through a bargain purchase option or a guarantee of the residual value) Executory costs (charges for insurance, maintenance, taxes, etc.) are not included as part of minimum lease payments....
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This note was uploaded on 04/07/2011 for the course ACC 302.1 taught by Professor Loran during the Spring '11 term at Piedmont College.
- Spring '11