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33 Cards in this Set
- Front
- Back
- 3rd side (hint)
Advantages of leasing for Lessee
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1) Financing benefits a) 100% financing
b) fewer restrictions and more flexible than other lease agreements c) creates claim against leased assets, not all assets |
2)Risk Benefit - risk is born by lessor
3) Tax benefit - lessee can write off full cost of asset, including parts related to land |
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Advantages of leasing of Lessee continued
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4) Financial Reporting Benefit - operating leases do not add liability or asset on balance sheet.
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5) Billing benefit- certain contract work leasing may permit contractor to charge more because interest in rental payments is allowed as a contract charge
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Capital Lease
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A lease that transfers substantially all the risks and benefits or ownership is in substance a purchase by the lessee and sale by the lessor and is a capital lease.
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Operating Lease
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A lease that does not transfer all the risks and benefits of ownership.
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Lessee Classifications
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1) Capital lease
2) Operating lease |
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Lessor lease classifications
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1) Sales type lease
2) Direct financing lease 3) Operating lease |
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Criteria applicable to lessee and lessor
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a. lease transfers ownership of property to the lessee by the end of the lease term
b. lease contains bargain purchase option |
c. lease term is equal to 75% or more of the estimated economic life of the property
d. present value of the minimum lease payment is equal to 90% or more of the fair value of the property. |
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Criteria applicable to lessor only
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a. collectibillity of minimum lease payment is reasonably assured
b. No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease |
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Classification by the lessee
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a. Capital lease - meets one or more criteria for lessee
b. Operating lease - does not meet any criteria applicable to lessee |
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Lessor - Sales type lease
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1) one or more criteria for lessee
2) both criteria for Lessor 3) must result in manufacturers or dealers profit or loss- Fair value of leased property at the inception of the lease is greater or less than cost or carrying value |
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Lessor - Direct Financing Lease
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1 ) One criteria for lessee is met
2) both criteria for lessor is met 3) Must not result in manufacturer or dealers loss or profit |
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Operating lease
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Lease that meets none of the lessee's criteria or does not meet both lessor's criteria, all leases other than sale-type and direct financing leases
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Annuity Due
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Payments made at beginning of each period
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as opposed to regular annuity payment made at end of each period.
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Effective interest method
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payment calculated with constant interest rate applied to new principal balance
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Executory Costs
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Ownership type costs such as insurance, maintenance, and property taxes
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usually paid by the lessee in a capital lease
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Minimum lease payment
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lease payment minus the executory costs paid by the lessor when calculating present value
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Classification of Capital Lease
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1)Present value of next year's payment
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current liability is the same each year (NPV of each payment)
remainder must be calculated. remainder is non current. For Finance lease the following PMT-PVyr2 pmt, PMT-PVyr3 pmt etcetra to get current portion (subtracting out unearned interest on lease) |
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Classification of Capital Lease on Balance Sheet
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Change in the present value
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Current liability is amount by which total balance of lease liability will decrease in the next year.
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Guaranteed residual value
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Company agrees to residual value at end of the lease (no transfer of ownership or bargain purchase option)
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Leased equipment value as follows
Present value of leased equipment rate x years. (annuity) Present value of guaranteed residual value of property pv 1 time payment |
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Capital lease example (payment at end of year)
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Dr Lease Equipment 100,000
Cr Capital Lease Obligation 100,000 Dr Interest Expense 12,000 Capital Lease Obligation 20,923.45 Cash 32,923.45 |
Dr Depreciation Expense 25,000
Cr Accum Depreciation Leased Equpment 25,000 2nd annual pmt Dr Interest Expense 9489.19 Dr Capital Lease Obligation 23,434.26 Cr Cash 32,923.45 |
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Capital lease example (payment at beginning of year) annuity due
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Dr Lease Equipment 112,000
Cr Capital Lease Obligation 112,000 1st payment Jan 1 Dr Capital Lease Obligation 32,923.45 Cr Cash 32,923.45 |
Dr Depreciation Expense 28,000
Cr Accumulated Depreciation 28,000 Dec 31 pmt Dr Interest Expense 9,489.19 Cr Accrued Interest on Capital Lease Obligation 9,489.19 Jan 1 pmt Dr Accrued Interest on CL 9,489.19 Dr Capital Lease Obligation 23,434.26 Cash 32,923.45 Cr |
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Bargain Purchase Option
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Present value of payments discount at rate+ present value of 1 pmt for the bargain purchase option
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Dr Leased Equipment 128,160.63
Cr Capital Lease Obligation 128,160.63 |
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Operating Lease (Lessor)
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Dr Equipment leased to others 300,000
Cr Cash 300,000 Collection of annual payment Dr Cash 50,000 Cr Rental Revenue 50,000 |
Dr Insurance Expense 2,000
Cr Cash 2,000 Dr Depreciation Expense leased equipment 30,000 Cr Accum Depreciation leased to others 30,000 |
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Direct Financing Lease (no unguaranteed residual value)
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Dr Equipment leased to others 100,000
Cr Cash 100,000 Dr Lease Receivable 131,693.80 Cr Equipment lease to others 100,000 Cr Unearned Interest: lease 31,693.80 |
Dr Cash 32,923.45
Cr Lease Receivable 32,923.45 Dr Unearned Interest Lease 12,000 Cr Interest Revenue Lease 12,000 |
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Direct Financing Lease No ungauranteed residuals payment in advance
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Dr. Equipment leased to others 391,371.20
Cr Cash 391,371.20 Lease receivable 500,000 Equipment leased to others 391371.20 Unearned interest:leases 108,628.80 |
Dr Cash 100,000
Cr Lease Receivable 100,000 Dr Unearned Interest: Lease 40,791.97 Cr Interest Revenue :Lease 40,791.97 |
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Present Value of Equipment
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is present value of payments plus present value of residual value or bargain price option
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Lease amount is recorded at undiscounted amount
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Sales Type Lease
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Difference between sales type lease and direct financing are manufacturer's or dealer's gross profit or loss and accounting for initial direct costs
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dealers loss or profit is difference between sales price (minimum lease pmt at implicit rate of interest) cost or carrying value of asset plus any indirect costs less present value of unguaranteed residual value accruing to the lessor
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Sales Type Lease example (annuity due) Lessor
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Dr. Lease Receivable 300,500
Cr. Sales Revenue 190,008.49 Cr. Unearned Interest: Lease 110,491.51 Dr. Cost of Asset Leased 120,000 Cr. Merchandise Inventory 120,000 |
Dr. Cash 30,000
Cr. Lease Receivable 30,000 Dr. Unearned Interest: Leases 19,201.02 Cr. Interest Revenue: Leases 19,201.02 |
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Statement of Cash Flows leases (Lessee)
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lessee: operating lease each payment is cash outflow from operations
lessee: sales lease each interest payment is operating cash outflow, principal is financing outflow |
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Statement of Cash Flows leases (Lessor)
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Lessor: operating lease, each payment received as cash inflow from operations
Direct financing lease: asset purchase as cash outflow from operations, Interest received inflow from operations and principal as cash inflow from investing activities |
Sales Type Lease: cash paid for asset as cash outflow from operations and payment received as cash inflow from operations
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Executory Costs (Lessee)
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Always subtract out from lease payment. Expensed yearly by lesee on capital lease
Subtract from yearly lease pmt when calculating NPV or lease. Also, that amount is the yearly lease pmt plus the executory costs |
Dr Executory Costs
Dr Capital lease Obligation Cr Cash |
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Depreciation Costs
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Expense Yearly for capital lease
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Dr. Depreciation Expense
Cr Accum Depreciation Leased Equipment |
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Annuity Due Lease
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Interest Expense Accrues at end of year, even though payment wont be until 1st of year.
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At first of year accrued interest is debited to get rid of liability ie
Dr Executory Costs 3,450 Dr Accrued Interest 28,614 Dr Capital Lease Obligation 37,936 Cr Cash 70,000 |