Wiley CPAexcel Exam Review 2015 Focus Notes: Financial Accounting and Reporting

Module 13

Leases

Accounting for Leases

Lessee Reporting

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 ...