Acct 4120 Chapter 15 Spiceland 5th edition

Acct 4120 Chapter 15 Spiceland 5th edition - Acct 4120...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Acct 4120 Chapter 15 Leases
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Parties to a lease: A lease is an agreement where the A lease is an agreement where the lessor lessor conveys the right to use conveys the right to use property, plant, or equipment, property, plant, or equipment, usually for a stated period of time, usually for a stated period of time, to the to the lessee lessee . . Chapter 15 page 2 Lessor = Owner of Lessor = Owner of property property Lessee = Renter Lessee = Renter
Background image of page 2
Two Types of Leases Capital Non-cancelable, and Transfer substantially all of the benefits and risks of property ownership. Operating Cancelable, or Do not transfer substantially all of the benefits and risk of property ownership Chapter 15 page 3
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Comparison of Two Lease Types Chapter 15 page 4 Operating Lease Capital Lease Substance of transaction Rental Purchase of an asset financed through debt Balance sheet Not shown Asset and liability Income statement Rent expense Depreciation of asset and interest expense on liability
Background image of page 4
Decision Criteria Chapter 15 page 5 A lease is considered a capital lease if it meets one of these four criteria: Transfer of ownership Bargain purchase option Lease term 75% of economic life Present value of Minimum Lease Payments (MLPs) 90% of fair market value
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
To Determine PV of MLPs: Chapter 15 page 6 The interest rate used is the lower of: Incremental borrowing rate (of lessee) Implicit rate (of lessor) Cash flows: Minimum rental payments during lease, and Amounts at the end of the lease Bargain purchase option Guaranteed residual value
Background image of page 6
Recording a Capital Lease Chapter 15 page 7 Asset $$ Lease Liability $$ $$ = PV of MLPs (i.e. amount from criteria number 4). Amount is limited to the fair market value of the asset.
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
An Example Chapter 15 page 8 Assume that: Lessee enters into a 5 year non-cancelable lease that requires payments of $106,000 ($6,000 of which represent executory costs) at the beginning of each of 5 years. The lease agreement further specifies that Lessee will guarantee the residual value of the property for $10,000, which is also equal to the estimated residual value at the end of the lease term. Lessee's incremental borrowing rate is 8% and Lessor's implicit rate is 10%
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 09/20/2011 for the course ACCT 4120 taught by Professor Franz during the Spring '11 term at Toledo.

Page1 / 25

Acct 4120 Chapter 15 Spiceland 5th edition - Acct 4120...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online