Chapter 15 - Leases

Chapter 15 - Leases - Chapter 15 Leases Accounting by the...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 15 – Leases Accounting by the Lessor and Lessee Lessor – the owner who provides use of asset Lessee – the one who borrows asset o The lessee agrees to make stipulated, periodic cash payments during term of lease Types of leases o Operating o Capital Tax incentives often motivate leasing Leasing is sometimes used as a means of off-balance-sheet financing Operational, tax, and financial market incentives often make leasing an attractive alternative to purchasing Capital Leases and Installment Notes Compared In keeping with basic accounting concept of substance over form, accounting for a capital lease parallels that for an installment purchase Interest expense accrues each period at the effective rate times the outstanding balance o Each payment includes both an amount that represents interest and an amount that represents a reduction of principal Because the lease payable balance declines with each payment, the interest becomes less each period Lease Classification Capital leases are agreements that we identify as being formulated outwardly as leases, but which are in reality essentially installment purchases Classification Criteria A lessee should classify a lease transaction as a capital lease if it includes a noncancelable lease term and one or more of these criteria (otherwise, it is an operating lease ): o The agreement specifies that ownership of the asset transfers to the lessee o The agreement contains a bargain purchase option BPO – provision in the lease that gives the lessee the option of purchasing the leased property at a bargain price A price sufficiently lower than the expected fair value of the property o The noncancelable lease term is equal to 75% or more of the expected economic life of the asset Implementation issues: Lease term may be uncertain o Lease may be cancelable after a designated noncancelable period Estimating the economic life of the leased property o The present value of the “minimum lease payments” is equal/greater than 90% of the fair value of the asset Minimum lease payments are payments the lessee is required to make in connection with the lease and consist of: total of periodic rental payments any guaranteed residual value any bargain purchase option price Additional Lessor Conditions FASB specifies that for the lessor to record a lease as a direct financing lease, two conditions must be met in addition to one of the four classification criteria: o The collectability of the lease payments must be reasonably predictable o If any costs to the lessor have yet to be incurred, they are reasonably predictable Operating Leases If a lease does not meet any of the criteria for a capital lease it is considered to be more in the nature of a rental agreement and is referred to as an operating lease Advance Payments Often lease agreements call for advance payments to be made at the inception of the lease that represent prepaid rent
Background image of page 1

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

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 5

Chapter 15 - Leases - Chapter 15 Leases Accounting by the...

This preview shows document pages 1 - 2. Sign up to view the full document.

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