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Wiley CPAexcel Exam Review 2014 Focus Notes: Financial Accounting and Reporting by Ray Whittington

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Focus on: Leases—Module 13

ACCOUNTING FOR LEASES

Lessee Reporting

image

Transfer of Rights and Risks of Ownership—At least one of four criteria

Actual transfer

  • Title transfers to lessee by end of term.
  • Lease contains bargain purchase option.

Transfer in substance

  • Lease term ≥ 75% of useful life.
  • Present value of minimum lease payments ≥ 90% of fair market value.

To calculate present value, lessee uses lower of:

  • Incremental borrowing rate.
  • Rate implicit in lease (if known).

Capital Leases

Inception of Lease

Journal entry to record lease:

Leased asset xxx
Lease obligation
xxx

Amount of asset and liability = Present value (PV) of minimum lease payments:

  • Payments beginning at inception result in annuity due.
  • Payments beginning at end of first year result in ordinary annuity.
  • Payments include bargain purchase option or guaranteed residual value (lump sum at end of lease).

Lease payments

Payment at inception:

Lease obligation xxx
Cash
xxx

Subsequent payments:

Interest expense xxx
Lease obligation xxx
Cash
xxx

Interest amount:

Balance in lease obligation
× Interest rate (used to calculate PV)
× Time since last payment (usually one year)
= Interest amount

Periodic Expenses—Depreciation

Actual transfer (first of first two criteria)

  • Life = Useful life of property
  • Salvage value taken into consideration

Transfer in substance (first of latter two criteria) ...

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