1. Ch 22 Accounting for Leases A lease is a contractual agreement by which a lessor (owner) provides a lessee (user) the right to use an asset for a specified period of time. In return for this right, the lessee agrees to make stipulated periodic cash payments during the term of the lease. Restrictions and the responsibilites for executory costs (maintenance, taxes & insurance) are also specified.
Assets provide probable future economic benefits that are obtained or controlled by a particular entity as a result of past transactions or events
CON #6

2. Advantages of Leasing Flexibility Cheaper & Easier Financing
Protection from Obsolescence
Tax Advantages
Off-Balance Sheet Financing

3. Off Balance Sheet Financing
“The basic drives of human are few: to get enough food, to find shelter & to keep debt off the balance sheet.”
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4. Conceptual Options in Accounting for Leases
Do not capitalize any leased assets
Capitalize some leases
Capitalize all long-term leases

5. Capitalize a lease if substantially all benefits & risks of ownership have been transferred
(1) The lease transfers ownership to the lessee,
(2) The lease contains a bargain purchase option (to purchase the asset at the end of the lease for an amount significantly less than its expected FMV),
(3) The fixed, noncancelable lease term covers at least 75% of the estimated economic life of the lease property (or the lease is renewable under a bargain renewal option extending to 75%…), or
(4) The present value of the minimum lease payments equals or exceeds 90% of the fair value of the leased property (minimum lease payments include (1) all rental payments, (2) guaranteed residual value, (3) penalty for failure to renew & (4) a bargain purchase option, but excludes executory costs (such as insurance, maintenance & taxes)).

6. Accounting for Operating Leases
By Lessee (user):
No Asset Recorded
No Recorded Liability
No Interest Expense Recorded
** Rent Expense is Recorded**
By Lessor (owner):
Asset is not removed from the books
There is no long-term receivable recorded
The Rent Revenue is recognized over time

7. Accounting for Capital Leases
Typical Lessee JE (at acquisition):
Leased Equipment $FV (or $PV MinLeasePymnt)
Lease Obligation $$$
both the asset & the liability are recorded
the asset is depreciated/amortized over time
the liability is paid off over time with interest
Typical Lessor JE (at lease inception):
Lease Receivable $FV (or $PV of MinLease Pymnt)
Equipment $Book Value
remove the asset from the books
replace it with a receivable
the receivable is collected over time with interest

8. Lease Amortization Schedule
…shows
Balance in the Lease Obligation
The amount of the lease payment
The dollar amount of the interest on the Unpaid Obligation
The dollar amount of the reduction in the Lease Obligation

9. Lessor Accounting For Leases
Operating Lease
“Capital Lease”
Direct Financing Lease - excludes “dealer’s profit”
meets at least one of the “Capital Lease” criteria, &
collectability of payments is reasonably predictable, &
lessor’s performance is substantially complete or predictable (no other important uncertainties about the unreimbursable costs yet to be incurred by Lessor)
Sales-Type Lease -- includes “dealer’s profit”
meets at lease one of the “Capital Lease Criteria
but fails to meet at least one of the two above

10. Accounting for Capital Leases
By Lessee
Leased Asset
Lease Obligations
Cash
Interest Expense
Depreciation Expense
Accum Depr—Capital Lease
Direct Financing Lease:Lessor
Cash
Lease Receivable
Asset
Unearned Lease Rev
Interest Revenue