chapter21

chapter21 - Basics of Leasing Basics of Leasing Accounting...

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Slide 21-1 Bob Anderson - UCSB UCSB Accounting for Leases Accounting for Leases Chapter Chapter 21 21 Slide 21-2 Bob Anderson Bob Anderson - UCSB UCSB A Lease is a contractual agreement between a lessor and a lessee lessee that gives the lessee the right to use specific property, owned by the lessor, for a specified period of time in return for stipulated, and generally periodic, cash payments (rents). . Basics of Leasing Basics of Leasing Lease term Lease Contract Rental payments Executory Costs Restrictions Noncancelable Early termination Default Slide 21-3 Bob Anderson Bob Anderson - UCSB UCSB Advantages of Leasing 100% Financing at Fixed Rates 100% Financing at Fixed Rates Protection against Obsolescence Flexibility Flexibility Less Costly Financing Alternative Minimum Tax Problems Off Off -Balance Sheet Balance Sheet -Financing Financing Slide 21-4 Bob Anderson Bob Anderson - UCSB UCSB Accounting by Lessee Accounting by Lessee Operating Lease Operating Lease Capital Lease Journal Entry: Journal Entry: Rent expense xxx Cash Cash xxx xxx Journal Entry: Leased equipment xxx Leased equipment Lease obligation xxx Lease obligation xxx The issue of how to report leases is the case of substance versu The issue of how to report leases is the case of substance versu s s form. Although technically legal title does not pass in lease form. Although technically legal title does not pass in lease transactions, the benefits from the use of the property do. Statement of Financial Accounting Standard No. 13, Statement of Financial Accounting Standard No. 13, “Accounting for Leases, Accounting for Leases, ” 1980 1980 A lease that transfers substantially all of the benefits and ris A lease that transfers substantially all of the benefits and ris ks of ks of property ownership should be capitalized (only noncancellable leases may be capitalized).
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Slide 21-5 Bob Anderson - UCSB UCSB Mechanics The expense recorded on a capital lease and an operating lease are THE SAME over the life of the asset. In a capital lease it hits the P&L via interest expense and depreciation expense VS operating, it all goes into rent expense. In a capital lease, think of it as a sale. The commitment to the lessor is a debt and should be treated like any other debt (current vs. noncurrent, accrue interest etc.) The asset gets depreciated just like if it were owned/purchased. The expense recorded on a capital lease and an operating lease are THE SAME over the life of the asset. In a capital lease it hits the P&L via interest expense and depreciation expense VS operating, it all goes into rent expense. In a capital lease, think of it as a sale. The commitment to the lessor is a debt and should be treated like any other debt (current vs. noncurrent, accrue interest etc.) The asset gets depreciated just like if it were owned/purchased.
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chapter21 - Basics of Leasing Basics of Leasing Accounting...

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