-
Lease
contractual agreement between a lessor and a lessee
-
Lessee
has the right to use specific property, owned by the lessor for a specified period of time
-
Lessor-who are they &
3 types
- Owner of the property
- Banks
- Captive leasing companies
- Independents
-
Banks 3
- Largest
- low-cost funds
- purchases assets at lower cost
-
Captive leasing companies 3
- 1.subsidiary who performs leasing operations for parent company.
- 2.point of sale advantage in finding leasing customers
- 3.product knowledge
-
Independents 2
- 1.Develops innovative contracts for lessees
- 2.can act as a leasing subsidaiary
-
Advantages of Leasing 6
- 1. 100 % financing at fixed rates
- 2. Protection against obsolescence
- 3. Flexibility
- 4. Less costly financing
- 5. tax advantages
- 6. off-balance-sheet financing
-
Questions to ask before beginning a lease problem? 4
- 1. Lessee or lessor problem?
- 2. Operating or capital?
- 3. Salvage value? Guaranteed or not?
- 4. Lease payment given? not, calculate PV
-
Criteria to determine operating or capital lease
Lessee: one or more of 4
- 1. Transfer of Ownership
- 2. Bargain Purchase Option
- 3. Lease term > 75% of Economic Life
- 4. Is PV of Payments > 90% of FMV
-
Criteria to determine operationg or capital lease
Lessor: one or more of 4
both of 2 addition criteria true
- 1. Collectibility of payments predictable
- 2. No important uncertainties
-
Executory costs 4
- insurance
- maintenance
- tax expenses
- not included in minimum lease payments
-
PV of minimum lease payments include 4
- 1. Minimum Rental Payments
- 2. Guaranteed Salvage Value
- 3. Penalty for Failure to Renew or Extend Lease
- 4. Bargan Purchase Option
-
Computation of Payments
Lessor
- BV or FMV of the asset
- Less: PV of Salvage Value
- =Amount to recover through annual payments
- / Factor (annuity or annuity due)
- = Annual Rental Payments
-
Total Financing Cost
Includes 3 calculation steps
- 1 Anneal Lease Payment - Executory Cost
- = Annual Rental Payments (ARP)
- 2. ARP * Lease terms
- = Cash Disbursed-CD (net of executory Cost)
- 3. CD - PV of Lease Payments
- = Interest Expense
-
Journal Entries for Capital Lease
Lessee:
1. Record Lease
2. Initial Payment
3. Amortization & Interest Yr-end
4. Depreciation yr-end
5. Other Payments
- 1. Dr. Equipment /Cr. Liability
- 2. Dr. Liability / Cr. Cash
- 3. Dr. Interest Expense / Cr. Interest payable
- 4. Dr. Dep. Exp / Cr. Accum. Dep.
- 5. Dr. In. Pay or Int. Expense, Liability
- Cr. Cash
-
Lessee
Salvage value
Includes in cost of equipment and liability if SV is guaranteed
-
Lessee
Interest rate
Uses lessor's interest rate if known and lower
-
Lessee
Depreciation
Based on life of lease, unless transfer of ownership or bargain purchase option exist, then use life of asset
-
Lessee
capitalizing the asset
cannot capitalize the asset at more than its fair value
-
Journal Entries for Capital Lease
Lessor
1. Record Lease
2. Initial Payment
3. Interest
4. Other Payments
- 1. Dr. Lease Receivable / Cr. Equipment
- 2. Dr. Cash / Cr. Lease Receivable
- 3. Dr. Interest Rec. / Cr. Interest Income
- 4. Dr. Cash / Cr. Lease Rec. , Interet Rec/Inc
-
Lessor
Salvage Value
Always assumes SV will be received; lessor includes SV in Lease Receivable
-
Interest Amortization Table
- Date
- Annual Lease Payment
- Interest
- Reduction of Obligation
- Lease -net
-
Direct Financing Lease
Lessor 2
- 1. FV of Asset = its cost
- 2. profit from interest revenue over time
-
Sales-Type Lease
Lessor 2
- 1. FV of asset > cost
- 2. profit from mark-up immediately and interest revenue over time
-
Sales-Type Lease
journal entry 2 sale, asset
guaranteed or unguaranteed
- Sale (MLP)
- Dr. Lease Receivable
- Cr. Sales Revenue
- Asset (BV)
- Dr. COGS
- Cr. Inventory
-
Sale-Leaseback
what is it?
The sale of property to a customer (now the lessor) who leases it back to the seller (now the lessee).
-
Sale-Leaseback
Accounting rules
- Lessor-normal rules applies
- Lessee-records sale, but defers gain
- (transaction has no substantial change)
-
Sale-Leaseback
Lessee
Journal Entry-sale, leaseback
- Sale
- Dr. Cash
- Cr. Asset, Unearned Revenue
- Leaseback
- Dr. Asset
- Cr. Liability
-
Sale-Leaseback
Unearned Revenue
Rules 3
- 1. Capital lease-contra account to asset
- 2. Operating lease-noncurrent unearned revenue
- 3. Amortize along with depreciation in capital lease and lease term in operating lease
-
Sale-Leaseback
Unearned Revenue amortization
journal entry
- Dr. Unearned Revenue
- Cr. Revenue or Depreciation Exp
-
Operating Leases
Renting an asset, not recorded in the books
-
Leasehold Improvements
- 1. Paid by Lessee.
- 2. Capitalized in Leasehold Improvement acct
- 3. Amortized over the shorter of the life of improvement or remaining lease term
- 4. Include renewal option in lease term if probable
-
Leasehold Improvements
Journal Entry-improvement, amortization
-
Various Payments in an Operation Lease
Types of payments examples 5
- 1. Free rent
- 2. uneven payments
- 3. bonus
- 4. closing cost
- 5. finder's fees
-
Rule for Various Payments
Regardless of timing of payments, compute Rent Expense & Rent Revenue on S/L basis.
-
Computation for Vaious Payments
- Total Amount of all Rents
- / Total lease term in years
- = Rent Exp. or Rent Inc. per year
-
Various Payments
Payment doesnt = expense
Lessor
Difference results in Unearned Revenue or Rent Receivable
-
Various Payments
Payment doesn't = expense
Lessee
Difference results in Prepaid Rent or Rent Payable
|
|
