Kế toán tài chính 2 - Chapter 17: Accounting for leases

CHAPTER 17ACCOUNTING FOR LEASESINTERMEDIATE ACCOUNTINGPrinciples and Analysis 2nd EditionWarfield Weygandt Kieso 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 lessor’s accounting for direct-financing leases.Describe the lessor’s accounting for sales-type leases.List the disclosure requirements for leases.Learning ObjectivesLeasing EnvironmentWho are players?Advantages of leasingConceptual nature of a leaseAccountingby LesseeAccountingby LessorOther Accounting IssuesCapitalization criteriaAccounting differencesCapital lease methodOperating methodComparisonSales-type leasesDisclosureUnresolved problemsEconomics of leasingClassificationDirect-financing methodOperating methodAccounting for LeasesLargest group of leased equipment involves: Information technology, Transportation (trucks, aircraft, rail), Construction and Agriculture.LO 1 Explain the nature, economic substance, and advantages of lease transactions.A lease is a contractual agreement between a lessor and a lessee, that gives the lessee the right to use specific property, owned by the lessor, for a specified period of time.The Leasing EnvironmentThree general categories: Banks.Captive leasing companies.Independents.LO 1 Explain the nature, economic substance, and advantages of lease transactions.Who Are the Players?The Leasing Environment100% financing at fixed rates. Protection against obsolescence.Flexibility.Less costly financing.Tax advantages.Off-balance-sheet financing.The Leasing EnvironmentLO 1 Explain the nature, economic substance, and advantages of lease transactions.Advantages of LeasingCapitalize a lease that transfers substantially all 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.The Leasing EnvironmentLO 1 Explain the nature, economic substance, and advantages of lease transactions.Conceptual Nature of a LeaseOperating LeaseCapital LeaseJournal Entry: Rent Expense xxx Cash xxxJournal Entry: Leased Equipment xxx Lease Obligation xxxThe issue of how to report leases is the case of substance versus form. Although technically legal title may not pass, the benefits from the use of the property do.Statement of Financial Accounting Standard No. 13, “Accounting for Leases,” 1980A lease that transfers substantially all of the benefits and risks of property ownership should be capitalized (only noncancellable leases may be capitalized).The Leasing EnvironmentLO 1 Explain the nature, economic substance, and advantages of lease transactions.If the lessee capitalizes a lease, the lessee records an asset and a liability generally equal to the present value of the rental payments.Records depreciation on the leased asset.Treats the lease payments as consisting of interest and principal.Accounting by the LesseeLO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.To record a lease as a capital lease, the lease must be noncancelable.One or more of four criteria must be met:Transfers ownership to the lessee.Contains a bargain purchase option.Lease term is equal to or greater than 75 percent of the estimated economic life of the leased property.The present value of the minimum lease payments (excluding executory costs) equals or exceeds 90 percent of the fair value of the leased property.Accounting by the LesseeLO 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.TransferofOwnershipBargain PurchaseLease Term>= 75%PV of Payments>= 90%Operat ing LeaseNoNoNoNoYesCapital LeaseLease AgreementYesYesYesLeases that DO NOT meet any of the four criteria are accounted for as Operating Leases.Accounting by the LesseeRecovery of Investment Test (90% Test)LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Accounting by the LesseeDiscount RateLessee 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.Recovery of Investment Test (90% Test)LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Accounting by the LesseeMinimum lease payments:Minimum rental paymentGuaranteed residual valuePenalty for failure to renewBargain purchase optionExecutory Costs:InsuranceMaintenanceTaxesExclude from PV of Minimum Lease Payment calculationAsset and Liability Recorded at the lower of:the present value of the minimum lease payments (excluding executory costs) orthe fair-market value of the leased asset.Asset and Liability Accounted for DifferentlyLO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Accounting by the LesseeIn computing the present value of the minimum lease payments, the lessee shoulduse its incremental borrowing rate in all cases. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is higher, assuming that the implicit rate is known to lessee.use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee.none of these.ReviewLO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Accounting by the LesseeA lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over theasset's remaining economic life. term of the lease.life of the asset or the term of the lease, whichever is shorter.life of the asset or the term of the lease, whichever is longer.QuestionLO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Accounting by the LesseeAsset and Liability Accounted for DifferentlyLO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Accounting by the LesseeDepreciation PeriodIf 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.Exercise: (Capital Lease with Unguaranteed Residual Value) On January 1, 2007, Burke Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Burke to make annual payments of $8,668 at the beginning of each year, starting January 1, 2007. The machine has an estimated useful life of 6 years and a $5,000 unguaranteed residual value. Burke uses the straight-line method of depreciation for all of its plant assets. Burke’s incremental borrowing rate is 10%, and the Lessor’s implicit rate is unknown.LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Accounting by the LesseeInstructions:(a) What type of lease is this? Explain.(b) Compute the present value of the minimum lease payments.(c) Prepare all journal entries for Burke through Jan. 1, 2008.Exercise: What type of lease is this? Explain.LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Accounting by the LesseeCapitalization Criteria:Transfer of ownershipBargain purchase optionLease term => 75% of economic life of leased propertyPresent value of minimum lease payments => 90% of FMV of propertyNONOLease term 5 yrs.Economic life 6 yrs. YES 83.3%FMV of leased property is unknown.Capital Lease, #3Exercise: Compute present value of minimum lease payments.LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Accounting by the LesseePayment $ 8,668Present value factor (i=10%,n=5) 4.16986PV of minimum lease payments $36,144 Exercise: Lease Amortization ScheduleLO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Accounting by the LesseeExercise: Journal entries for Burke through Jan. 1, 2008.LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Accounting by the LesseeExercise: Journal entries for Burke through Jan. 1, 2008.LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Accounting by the LesseeExercise: Comparison of Capital Lease with Operating LeaseLO 3 Contrast the operating and capitalization methods of recording leases.Accounting by the Lessee* rounding* Guaranteed Residual Value and Bargain Purchase Lessee should increase the present value of the minimum lease payments by the present value of the guaranteed residual value and bargain purchase option. Present value should also be reported as part of the lease liability.LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Accounting by the LesseeInterest revenue.Tax incentives.High residual value.Accounting by the LessorBenefits to the LessorLO 4 Identify the classifications of leases for the lessor.A lessor determines the amount of the rental, based on the rate of return needed to justify leasing the asset.If a residual value is involved (whether guaranteed or not), the company would not have to recover as much from the lease paymentsEconomics of LeasingAccounting by the LessorLO 4 Identify the classifications of leases for the lessor.Exercise: (Computation of Rental) Morgan Leasing Company signs an agreement on January 1, 2007, to lease equipment to Cole Company. The following information relates to this agreement.The term of the noncancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years.The cost of the asset to the lessor is $245,000. The fair value of the asset at January 1, 2007, is $245,000.The asset will revert to the lessor at the end of the lease term at which time the asset is expected to have a residual value of $43,622, none of which is guaranteed.The agreement requires annual rental payments, beg. Jan. 1, 2007.Collectibility of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.Accounting by the LessorLO 4 Identify the classifications of leases for the lessor.Accounting by the LessorLO 4 Identify the classifications of leases for the lessor.Exercise: (Computation of Rental) Assuming the lessor desires a 10% rate of return on its investment, calculate the amount of the annual rental payment required. ÷x-Operating leases.Direct-financing leases.Sales-type leases.Classification of Leases by the LessorAccounting by the LessorLO 4 Identify the classifications of leases for the lessor.Classification of Leases by the LessorAccounting by the LessorLO 4 Identify the classifications of leases for the lessor.A sales-type lease involves a manufacturer’s or dealer’s profit, and a direct-financing lease does not.Illustration 17-12Classification of Leases by the LessorAccounting by the LessorLO 4 Identify the classifications of leases for the lessor.A lessor may classify a lease as an operating lease but the lessee may classify the same lease as a capital lease.Illustration 17-13In substance the financing of an asset purchase by the lessee.Direct-Financing Method (Lessor)Accounting by the LessorLO 5 Describe the lessor’s accounting for direct-financing leases.Accounting by the LessorExercise: Prepare an amortization schedule that would be suitable for the lessor. * rounding* LO 5 Describe the lessor’s accounting for direct-financing leases.Accounting by the LessorExercise: Prepare all of the journal entries for the lessor for 2007 and 2008.LO 5 Describe the lessor’s accounting for direct-financing leases.Accounting by the LessorExercise: Prepare all of the journal entries for the lessor for 2007 and 2008.LO 5 Describe the lessor’s accounting for direct-financing leases.Records each rental receipt as rental revenue. Depreciates the leased asset in the normal manner.Operating Method (Lessor)Accounting by the LessorLO 5 Describe the lessor’s accounting for direct-financing leases.Sales-type leases (lessor).Disclosure.Unsolved problems.Other Accounting IssuesPrimary difference between a direct-financing lease and a sales-type lease is the manufacturer’s or dealer’s gross profit (or loss).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.Sales-Type Leases (Lessor)LO 6 Describe the lessor’s accounting for sales-type leases.Other Accounting IssuesThe primary difference between a direct-financing lease and a sales-type lease is themanner in which rental receipts are recorded as rental income.amount of the depreciation recorded each year by the lessor.recognition of the manufacturer's or dealer's profit at the inception of the lease.allocation of initial direct costs by the lessor to periods benefited by the lease arrangements.ReviewOther Accounting IssuesLO 6 Describe the lessor’s accounting for sales-type leases.General description of the nature of the lease. Nature, timing and amount of cash inflows and outflows associated with leases, including payments for each of the five succeeding years. Amount of lease revenues and expenses reported in the income statement each period. Description and amounts of leased assets by major balance sheet classification and related liabilities.Amounts receivable and unearned revenues under lease.Disclosing Lease DataLO 7 List the disclosure requirements for leases.Other Accounting IssuesThe Lease Liability account should be disclosed asall current liabilities.all noncurrent liabilities.current portions in current liabilities and the remainder in noncurrent liabilities.deferred credits.ReviewLO 7 List the disclosure requirements for leases.Other Accounting IssuesLO 7 List the disclosure requirements for leases.Lease Accounting – Unresolved ProblemsCompanies make strenuous efforts to circumvent Statement No. 13 because:Capitalizing a lease can materially increase reported liabilities and adversely affect debt-to-equity ratio. Charges to expense made in the early years of lease term are higher under a capital lease than under a operating lease, frequently without tax benefit.Unlike lessees, lessors try to avoid having lease arrangements classified as operating leases.Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.Copyright