Focus on: Leases—Module 13
ACCOUNTING FOR LEASES
Transfer of Rights and Risks of Ownership—At least one of four criteria
- 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).
Inception of Lease
Journal entry to record lease:
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).
Payment at inception:
Balance in lease obligation
× Interest rate (used to calculate PV)
× Time since last payment (usually one year)
= Interest amount
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) ...