AC221Chapter7 - AC221 - Financial Accounting Chapter 9...

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1 AC221 - Financial Accounting Chapter 9 Leases 1 Ana Albuquerque, AC221 Financial Accounting Agenda Lease ± Leases ± Distinction between operating and capital leases ± Impact on Balance Sheet and Income Statement of operating and capital 2 Ana Albuquerque, AC221 Financial Accounting Statement of operating and capital leases.
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2 Buy Vs. Rent Decision ± Suppose a company wants to purchase a new equipment that costs $248,690 (useful life of 3 years). ± The firm can: ± Option A - Borrow ± Borrow $248,690 at a rate of 10%. Pay down 100,000 every year for 3 years. 3 Ana Albuquerque, AC221 Financial Accounting ± Option B - Rent ± Rent for 100,000 per year for 3 years. Option A - Borrow ± B/S BOY Asset 248,690 Loan Payable 248,690 EOY Cash -100,000 Loan Payable 248,690 + Interest 24,869 Asset 248,690 - Payment 100,000 -Acc. Dep. 82,897 173,559 165,793 RE -107,766 4 Ana Albuquerque, AC221 Financial Accounting ± I/S 65,793 65,793 Deprec. exp. 82,897 Interest exp. 24,869 Total exp. 107,766
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3 Option B - Rent ± B/S ± I/S Asset -- Loan Payable -- Cash -100,000 Loan Payable -- Asset -- RE -100,000 -100,000 -100,000 Rent Exp. 100,000 BOY EOY 5 Ana Albuquerque, AC221 Financial Accounting ± Option A vs. option B. ² In both options company uses the asset; ² In A company shows A/L in the B/S; ² In B company shows no A/L in the B/S Leases ± A lease is a contract in which the owner A lease is a contract in which the owner of an asset (the lessor) conveys to another party (the lessee) the right to use some asset usually for a stated period of time, in exchange for periodic 6 Ana Albuquerque, AC221 Financial Accounting cash payments.
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4 Types of Leases ± For accounting purposes, two types of leases: ± Operating ± Lessee rents the asset ± Lessee accrues rent expense ± Capital 7 Ana Albuquerque, AC221 Financial Accounting ± Lessee economically owns the asset. ± Lessee records the leased asset in the B/S (i.e. capitalizes the asset) and reflects the corresponding lease obligation. For accounting purposes the distinction is important Leases ± For accounting purposes, the distinction is important, from lessee’s perspective, ± Operating leases are off -balance-sheet. ± Capital leases are on -balance-sheet: record both an asset and a liability. 8 Ana Albuquerque, AC221 Financial Accounting ± Which one would the lessee prefer?
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AC221Chapter7 - AC221 - Financial Accounting Chapter 9...

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