Professional Documents
Culture Documents
CHAPTER
21
Learning Objectives
1. 2. 3. 4. 5. 6. 7. 8. 9.
Chapter 21-3
Explain the nature, economic substance, and advantages of lease transactions. Describe the accounting criteria and procedures for capitalizing leases by the lessee. Contrast the operating and capitalization methods of recording leases. Identify the classifications of leases for the lessor. Describe the lessors accounting for direct-financing leases. Identify special features of lease arrangements that cause unique accounting problems. Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting. Describe the lessors accounting for sales-type leases. List the disclosure requirements for leases.
Leasing Environment Who are players? Advantages of leasing Conceptual nature of a lease
Accounting by Lessee Capitalization criteria Accounting differences Capital lease method Operating method Comparison
Operating method
Chapter 21-4
Construction
Agriculture
Chapter 21-5
Independents.
Chapter 21-6
5. Tax Advantages.
6. Off-Balance-Sheet Financing.
Chapter 21-7
of the benefits and risks of property ownership, provided the lease is noncancelable.
Leases that do not transfer
substantially all the benefits and risks of ownership are operating leases.
Chapter 21-8
Operating Lease
Journal Entry: Rent expense Cash xxx
Capital Lease
Journal Entry: Leased equipment Lease liability xxx
xxx
xxx
A lease that transfers substantially all of the benefits and risks of property ownership should be capitalized (only noncancellable leases may be capitalized).
Chapter 21-9
Chapter 21-10
LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.
Chapter 21-11
LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.
Leases that DO NOT meet any of the four criteria are accounted for as Operating Leases.
Illustration 21-4
Chapter 21-12
LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.
LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.
LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.
Minimum rental payment Guaranteed residual value Penalty for failure to renew Bargain-purchase option Insurance Maintenance Taxes
Exclude from PV of Minimum Lease Payment Calculation
LO 2
Executory Costs:
Chapter 21-15
LO 2
Chapter 21-17
LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.
Chapter 21-18
LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.
Depreciation and the discharge of the obligation are independent accounting processes.
Chapter 21-19
LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.
LO 2
Capital Lease, #3
NO NO
Lease term Economic life 5 yrs. 6 yrs. 83.3%
YES
Chapter 21-21
LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.
Lease Liability
Lease Liability Cash
Chapter 21-22
41,565
9,968 9,968
LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.
LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.
8,313 8,313
3,160 3,160
Chapter 21-24
LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.
Cash
9,968
Chapter 21-25
LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.
9,968 9,968
41,565
$ 49,840
Interest Revenue.
2. Tax Incentives.
3. High Residual Value.
Chapter 21-28
If a residual value is involved (whether guaranteed or not), the company would not have to recover as much from the lease payments
Chapter 21-29
4. 5.
Chapter 21-30
$
x
$ 343,000
-
Chapter 21-32
A sales-type lease involves a manufacturers or dealers profit, and a direct-financing lease does not.
Chapter 21-33
A lessor may classify a lease as an operating lease but the lessee may classify the same lease as a capital lease.
Chapter 21-34
Chapter 21-35
Chapter 21-36
Interest Revenue
27,860
Chapter 21-37
Chapter 21-38
Chapter 21-39
Cash
Rental Revenue
64,400
64,400
Accumulated Depreciation
$343,000 / 6 years = 57,167
Chapter 21-40
57,167
Chapter 21-41
LO 6 Identify special features of lease arrangements that cause unique accounting problems.
Chapter 21-42
LO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.
Chapter 21-43
LO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.
LO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.
LO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.
NOTE: For the Lessee, the minimum lease payment includes the guaranteed residual value but excludes the unguaranteed residual value.
Chapter 21-46 Solution on notes page
LO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.
Chapter 21-47
LO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.
Chapter 21-48
LO 7
Chapter 21-49
LO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.
Lease Liability
Accumulated DepreciationCapital Leases Leased Equipment under Capital Leases Cash
Chapter 21-50
4,545.24
95,000.00 100,000.00 2,000.00
LO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.
Chapter 21-51
LO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.
Chapter 21-52
LO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.
Chapter 21-53
LO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.
Chapter 21-54
Chapter 21-55
LO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.
Illustration 21-25
Chapter 21-56
Chapter 21-57
LO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.
Lessor records the sale price of the asset, the cost of goods sold and related inventory reduction, and the lease receivable. Difference in accounting for guaranteed and unguaranteed residual values.
Chapter 21-58
Chapter 21-60
Chapter 21-61
(January 1, 2012)
Chapter 21-62
Chapter 21-63
Chapter 21-64
Leasing was on the FASBs initial agenda in 1973 and SFAS No. 13 was issued in 1976 (before the conceptual framework was developed). SFAS No. 13 has been the subject of more than 30 interpretations since its issuance.
Chapter 21-68
The iGAAP leasing standard is IAS 17, first issued in 1982. This standard is the subject of only three interpretations. One reason for this small number of interpretations is that iGAAP does not specifically address a number of leasing transactions that are covered by U.S. GAAP. Examples include lease agreements for natural resources, sale-leasebacks, real estate leases, and leveraged leases.
Both U.S. GAAP and iGAAP share the same objective of recording leases by lessees and lessors according to their economic substancethat is, according to the definitions of assets and liabilities.
U.S. GAAP for leases in much more rule-based with specific bright-line criteria to determine if a lease arrangement transfers the risks and rewards of ownership; iGAAP is more general in its provisions.
Chapter 21-69
Chapter 21-70
LO 10
Illustration 21A-2
Chapter 21-71
Chapter 21-72
Illustration 21A-3
Chapter 21-73
Chapter 21-74
Illustration 21A-4
Chapter 21-75
Chapter 21-76
Illustration 21A-5
Chapter 21-77
Advantages:
1. May allow seller to refinance at lower rates. particularly when liquidity is tight. 2. May provide another source of working capital,
Chapter 21-79
Lessee
If the lease meets one of the four criteria for treatment as a capital lease, the seller-lessee should Account for the transaction as a sale and the lease as a capital lease. Defer any profit or loss it experiences from the sale of the assets that are leased back under a capital
lease.
Amortize profit over the lease term .
Chapter 21-80
Lessee
If none of the capital lease criteria are satisfied, the seller-lessee accounts for the transaction as a sale and the lease as an operating lease.
Lessor
If the lease meets one of the criteria in Group I and both of the criteria in Group II, the purchaser-lessor records the transaction as a purchase and a direct-
financing lease.
If the lease does not meet the criteria, the purchaserlessor records the transaction as a purchase and an operating lease.
Chapter 21-82
Sale-Leaseback Example
American Airlines on January 1, 2011, sells a used Boeing 757 having a carrying amount on its books of $75,500,000 to CitiCapital for $80,000,000. American
5.
6.
Chapter 21-83
Sale-Leaseback Example
This lease is a capital lease to American because
Sale-Leaseback Example
Illustration 21B-1
Chapter 21-85
Sale-Leaseback Example
Chapter 21-86
Copyright
Copyright 2009 John Wiley & Sons, Inc. All rights reserved.