F5_T2_lecture - F5 T2 TURE F5 : Leases, Liabilities, and...

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Unformatted text preview: F5 T2 TURE F5 : Leases, Liabilities, and Bonds (Topic 2 : accounting for Leases) .-.-._.- .-.-..-_ 35:14 :rnaining 5.? AM «i is 4. CPA-00434 Lease A does not contain a bargain purchase option, but the lease term is equal to 9d percent of the estimated economic life of the leased property. Lease B does not transfer ownership ofthe property to the lessee by the end of the lease termr but the lease term is equal to T5 percent of the estimated economic life of the leased property. How should the lessee classify these leases under U.S. GAAP? Lease A Lease B a. Operating lease Capital lease b. Operating lease Operating lease c. Capital lease Capital lease d. Capital lease Operating lease 1‘. Class Question Answer 3? CLASS QUESTION ANSWER 4. C Pit-00434 Choice "c" is correct. Both leases haye terms equal to or more than 75% of their estimated economic life; therefore. both are capital leases under U.S. EMF. |||| __- 1—.- Fc‘uie: if any one of the following conditions is met. a lease is considered a capital lease under LLB. GM and is treated as if owned by the lessee: 1. The lease transfers ownership to the lessee by the end of the lease term. 2. The lease contains a bargain purchase option. 3. The present value at the beginning of the lease term of the “minimum lease payments” eouals or TURE F5 : Leases, Liabilities, and Bends (Topic 2 : Accounting for Leases) rem. «2 —L-—::. '; [A] 4. CPA-00434 Lease A does not contain a bargain purchase option, but the lease term is equal to so percent of the 1“. Class Question Answer ggjgg CLASS QUESTION ANSWER E 01:05 U3=19 4. CPA-00434 02:"? an; Choice "c" is correct. Both leases have terms equal to or more than 75% of their estimated economic 5.1.12 ‘ life; therefore. both are capital leases under U.S. GAAP. 00:41 03:55 Rule: if any one of the following conditions is met. a lease is considered a capital lease under LLB. GMP “2:39 and is treated as if owned by the lessee: 03:10 some i 1. The lease transfers ownership to the lessee by the end ofthe lease term. 01:08 2. The lease contains a bargain purchase option. “3&3 3. The present value at the beginning of the lease term of the “minimum lease payments" equals or exceeds 90% of the fair value ofthe leased property. Um 4. The lease term is ?5% or more of the estimated economic life ofthe leased property. one? 31:21 [3:] Choice "a" is incorrect. Lease A is a capital lease. “ma Choice “b” is incorrect. Both leases A and B are capital leases. 35:14 Choice “d” is incorrect. Lease B is a capital lease. :rnaining 5:5] :lM TURE F5 : Leases, Liabilities, and Bonds (Topic 2 : accounting for Leases) a: r . lcl .-.-._.- .-.-..-_ 34:36 :maining 5.5] AM a.-- 5. CPA-05493 Which of the following criteria could result in a lease being classified as an operating lease under U.S. GAAP and a finance lease under IFRS? a. The lease contains a written bargain purchase option. b. The lease term is for 33% of the economic life of the asset. c. The lease transfers ownership of the asset to the lessee at the end of the lease term. d. The present value ofthe minimum lease payments amounts to 33% of the fair value ofthe asset. J“. 1'Class Question Answer CLASS QUESTION ANSWER 5. CPA-DBéBB Choice "d" is correct. lfthe present value ofthe minimum lease payments amounts to 33% of the fair value ofthe asset, the lease would be classified as an operating lease under US. GMP and would mo: likely be classified as a finance lease under IFRS. Under IFRS, a lease is classified as a finance lease i the present value of the minimum lease payments amounts to at least substantially all of the fair value c the leased asset. An argument could be made that 33% is "at least substantially all of the fair value of ti asset“ Choice "a" is incorrect. A lease would be classified as a capital lease under Ll.S. GMP and a finance lease under IFRS ifthe lease contains a written bargain purchase option. Choice "b" is incorrect. A lease would be classified as a capital lease under U.S. GMP and a finance lease under IFRS ifthe lease term is for 33% of the economic life of the asset. h I---- . . . . ..I..l l...— ..I---‘.£:...l ..._. .. -._.__!'l.._l I . . . . . ._..._l...- I I l"- flll. Ah .__...I ._ 1'!........... HL-!-.— 1|-H2- :.....---....l. -'-‘I——' -'-‘I—'— 33:31. :maining 4‘3] AM 6. TBS-00022 Medical Imaging Co. leased equipment to Family Care. Inc. for 10 years beginning on January 1. Year 1. The first lease payment of $12,000 was made on January 1. Year1, with all subsequent lease payments due annually on December 31st. The equipment has an estimated useful life of 12 years and its fair value is equal to the present yalue of the minimum lease payments. The interest rate implicit in the lease is 10% and is known to Family Care, Inc. Family Care, Inc.'s incremental borrowing rate is 11%. Family Care uses U.S. GAAF. At the end ofthe lease term. Family Care, Inc. does not have the option to purchase the equipment and ownership will nottransfer. Present yafue amounts: P0 of an annuity due of $1 for 10 periods at 10% 0.?59 P0 of an annuity due of $1 for 10 periods at 11% 6.53? l. 1I.I'i.li|| this lease be accounted for as an operating lease or a capital lease by the lessee? ("forming Amount of Lease S'I'Ill Frlif'inn I'm-RH TURE F5 : Leases, Liabilities, and Bonds (Topic 2 : Accounting for Leases) awn fi' [a] 3'31 We” —— Ema” Sum” —— 33' I: 11. Calculate the annual depreciation expense if the lessee uses the straight-line method of “'3‘ depreciation. E99 . 1‘!- Elass Question Answer 02:5? 01:22 W 3? CLass QUESTION ANSWER -F_ 00:41 03:55 02:39 6. TBS-00022 03:10 03:45 = 1. Will this lease be accounted for as an operating lease or a capital lease by the lessee? Capital Lease 01:08 02.13 2. 1ll'Il'hat is the P'li of the minimum lease payments? 531.1135 02:55 3. Using the amortization table below, calculate the interest expense accrued during Year 1. 55,911 02:32 02:13 Periodic tease interest on tease Amortization of Lease 01”]? [- ] Date Payment Gair‘gatian l.i1:r.i.a'.lit:.ar Carrying Amount ofteas: 01:21 )1 was $12,111 51210:: $59,103 :rnaining 121Ir 31;“!F ear 1 $12JJIJD $6,311 $53089 554.1319 F:|'l AM :2 CLASS QUESTION ANSWER 6. TBS-00022 1. Will this lease be accounted for as an operating lease or a capital lease by the lessee? 2. What is the PU oi the minimum lease payments? $31,1fl8 $5,911 3. Using the amortization table below. calculate the interest expense accrued during “fear 1. Periodic Lease interest on Lease Amortization of Lease Date Payment Obligation tiaaiiity Carrying Amount of Lease —_ —— mm 5m 1:11,:Ir 3 1i“! ear 1 $12,0DIJ $6,911 $5,089 SHADE fiancee The lease will be accounted for as a capital lease under U.S. GAAP because it meets two of the capital lease criteria: 4. Calculate the annual depreciation expense if the lessee uses the straightnline method of depreciation. D - fl - There is no ownership transfer at the end of the lease. W — fl — There is no bargain purchase option. N - m — The present yalue of the minimum lease payments is equal to the fair value of the leased asset. See the calculation of the PUMLP below. 8 — E —The lease life is equal or greater than ?5% of the life of the asset: 10 yea rsiiE years = 84%. The PU of the minimum {ease payments: :2 CLASS QUESTION ANSWER utlcse l til-.1 IUHDG W”! L":- :lithUIfl'UL-l IUI :13 a bdplifll IU-flh'fi LIIILIEI Um]. “Mr— UGWUDU If. HIGH-Lb IWU Ul HIE hflPILE-ll LA] lease crrtena: D - fl - There is no ownership transfer at the end of the lease. W — m — There is no bargain purchase option. N — m — The present yalue of the minimum lease payments is equal to the fair yalue of the leased asset. See the calculation of the PUMLP below. 5 — E —The lease life is equal or greater than ?5% of the life of the asset: 10 yearsi12 years = 04%. The P1! of the minimum lease payments: Annual lease payment $12,000 Fly“ factor 0.?50 P‘y' of lease payments M The 10% PM“ factor is used because the 10% implicit rate is less than Family Care's incremental borrowing rate and is known to the lessee. Because the PU ofthe minimum lease payments is equal to the fair value ofthe leased equipment1 the lessee will capitalize the equipment at a yalue of $31,108 using the following journal entry: Dr. Leased equipment 31 r1013 Cr. Obligation under capital lease 01,100 In this case, the asset will reyert back to the lessor at the end of the lease term because there is no ownership transfer and no bargain purchase option. Thus, the equipment will be depreciated oyer the 10 year lease term. Annual depreciation is calculated as follows: $31,1UBI1U years = $3.11UEU ...
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This note was uploaded on 05/31/2011 for the course ACCT 593 taught by Professor Karylfriedman during the Spring '11 term at Keller Graduate School of Management.

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