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1. For a finance lease from the lessee perspective, the unguaranteed residual value is ignored when computing both the lease liability and depreciable amount.
2. A finance lease exists if there is a transfer of ownership, bargain purchase option, lease term is at least 75% of asset life, or present value of payments is at least 90% of asset value.
3. The lease liability and asset are initially recognized at the lower of fair value or present value of minimum payments, which include rental payments, bargain purchase option price, and guaranteed residual value.
1. For a finance lease from the lessee perspective, the unguaranteed residual value is ignored when computing both the lease liability and depreciable amount.
2. A finance lease exists if there is a transfer of ownership, bargain purchase option, lease term is at least 75% of asset life, or present value of payments is at least 90% of asset value.
3. The lease liability and asset are initially recognized at the lower of fair value or present value of minimum payments, which include rental payments, bargain purchase option price, and guaranteed residual value.
1. For a finance lease from the lessee perspective, the unguaranteed residual value is ignored when computing both the lease liability and depreciable amount.
2. A finance lease exists if there is a transfer of ownership, bargain purchase option, lease term is at least 75% of asset life, or present value of payments is at least 90% of asset value.
3. The lease liability and asset are initially recognized at the lower of fair value or present value of minimum payments, which include rental payments, bargain purchase option price, and guaranteed residual value.
COMPUTING FOR LEASE LIABILITY AND DEPRECIABLE AMOUNT Lease is a FINANCE lease if it has any of the following: 1. Transfer of owenship 2. A Bargain purchase option 3. Lease Term/Life of Asset = 75% (at least) 4. Present Value of Lease Payments/Fair Value of Leased Assets = 90% (at least) Minimum Lease Payments - Rental Payments - Payments required under bagain purchase option - Guaranteed Residual Value (in the absence of bargain purchase option) Recognition of Asset and Liability - the lower of the Fair Value of the Leased Property at inception date and Present Value of Minimum Lease Payments - plus, in the case of Bargain Purchase Option, Present Value of the Bargain Purchase Option - plus, in the case of Guaranteed Residual Value, Present Value of the Guaranteed Residual Value - initial direct costs is part of the leased asset ONLY and SHOULD NOT FORM PART OF LEASE LIABILITY! - executory costs are expensed outright Payment of Lease Liability (debit of lease liability) - annual payments - interest expense = lease liability to be debited Ammortization - the difference between the face value of the rentals and its present value is the interest to be ammortized using effective interest method Depreciation (conisder only Residual Value if it is GUARANTEED, otherwise ignore it) - use LIFE OF THE ASSET if the financial lease qualifies under any of these: - Transfer of ownership - Bargain Purchase Option - use the shorter between LIFE OF THE ASSET and LEASE TERM if
the financial lease qualifies under any of these:
- 75% criteria - 90% criteria Bargain Purchase Option (Initial Recognition of Liability & Asset = Present Value of rental payments and Bargain purchase option) if it is exercised: Lease Liability xx (equal to bargain purchase option price) Cash xx if not, recognize a loss equal to Carrying Amount of Asset minus Lease Liability Balance: Accumulated Dep. xx Lease Liability xx Loss on finance Lease xx Asset xx Guaranteed Residual Value (Initial Recognition of Liability & Asset = Present Value of rental payments and Guaranteed Residual Value) <ONLY IF GUARANTEED BY LESSEE & NOT A THIRD PARTY> - the asset will revert back to the lessor at the end of lease term at the amount equal to the Guaranteed Residual Value - upon return, both the Carrying Amount of the asset and Lease Liability(add accrued interest payable if any) should always be equal to the Guaranteed Residual Value - NOTE: if the Fair Value at return date is lower than the guaranteed Residual Value, a loss should be recorded as follows: Loss on Finance Lease xx (difference between FV and Guaranteed Residual Value) Cash xx - no entry is needed if the FV is higher than the Guaranteed Residual Value Actual Purchase of Leased Asset Cost of Asset = Carrying Amount of Leased Asset + Cash Payment Balance of Lease Liability