Kieso_IA_16e_PPT_Ch21v2.pptx

Lo 2 accounting by the lease agreement leases that do

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LO 2 ACCOUNTING BY THE LESSEE
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21-11 Lease Agreement Leases that DO NOT meet any of the four criteria are accounted for as Operating Leases . ILLUSTRATION 21-4 Diagram of Lessee’s Criteria for Lease Classification LO 2 ACCOUNTING BY THE LESSEE
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21-12 Capitalization Criteria Transfer of Ownership Test If the lease transfers ownership of the asset to the lessee, it is a capital lease. Bargain-Purchase Option Test At the inception of the lease, the difference between the option price and the expected fair market value must be large enough to make exercise of the option reasonably assured. LO 2 ACCOUNTING BY THE LESSEE
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21-13 Economic Life Test (75% Test) Lease term is generally considered to be the fixed, noncancelable term of the lease. Bargain-renewal option can extend this period. At the inception of the lease, the difference between the renewal rental and the expected fair rental must be great enough to make exercise of the option to renew reasonably assured. Capitalization Criteria LO 2 ACCOUNTING BY THE LESSEE
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21-14 Illustration: Home Depot leases Dell PCs for two years at a rental of $100 per month per computer and subsequently can lease them for $10 per month per computer for another two years. The lease clearly offers a bargain-renewal option; the lease term is considered to be four years. LO 2 ACCOUNTING BY THE LESSEE
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21-15 Recovery of Investment Test (90% Test) Minimum Lease Payments: Minimum rental payment Guaranteed residual value Penalty for failure to renew or extend the lease Bargain-purchase option Executory Costs: Insurance Maintenance Taxes Exclude from present value of Minimum Lease Payment Calculation Capitalization Criteria LO 2 ACCOUNTING BY THE LESSEE
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21-16 Discount Rate Capitalization Criteria Lessee computes the present value of the minimum lease payments using its incremental borrowing rate , with one exception. If the lessee knows the implicit interest rate computed by the lessor and it is less than the lessee’s incremental borrowing rate, then lessee must use the lessor’s rate . LO 2 ACCOUNTING BY THE LESSEE
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21-17 Asset and Liability Recorded at the lower of: 1. present value of the minimum lease payments (excluding executory costs) or 2. fair-market value of the leased asset at the inception of the lease. Asset and Liability Accounted for Differently LO 2 ACCOUNTING BY THE LESSEE
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21-18 Depreciation Period If lease transfers ownership , depreciate asset over the economic life of the asset. If lease does not transfer ownership , depreciate over the term of the lease . Asset and Liability Accounted for Differently LO 2 ACCOUNTING BY THE LESSEE
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21-19 Effective-Interest Method Used to allocate each lease payment between principal and interest.
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  • Spring '14
  • Depreciation, Lessee, Lessor, Finance lease, Caterpillar

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