list the 4 criteria for a capital lease. it can have any of the following
- The lease provides for the transfer of ownership.
- The lease contains a bargain purchase option (BPO).
The lease term is 75% or more of the estimated economic life of the leased property. - This criterion is inapplicable if the beginning of the lease term falls within the last 25% of the property’s total estimated economic life.
- The present value of the minimum lease payments is at least 90% of the fair value of the leased property to the lessor at the inception of the lease.
How do you record a capital lease on the balance sheet?
present value of the minimum lease payments.
The discount rate used in calculating the present value of the minimum lease payments is the lower of
- The lessor’s implicit rate if it is known to the lessee or
- The lessee’s incremental borrowing rate.
Do you include residual value in the calculation of a capital lease?
yes.
If fair value of a capital lease is less than the present value of the minimum lease payments, you should record the lease at what?
Fair value
if a BPO is in a capital lease the lessee should depreciate based on?
The useful life of the asset.
The JE by the lessor for a financing type capital lease
DR. Lease receivables (gross investment)
CR. Asset (FV = carrying amount)
CR. Unearned interest income
The JE by the lessor for a sales type capital lease
DR. Lease payments receivable DR. Cost of goods sold CR. Unearned interest income CR. Sales revenue CR. Asset
what must be disclosed for a capital lease
5 years worth of lease payments and the balance after that.
off balance sheet financing refers to what?
operating leases
how do you calculate the percentages on a sale/ lease back
PV on lease payments/ sales price
if a sale lease back falls into the below 10% range then
recognize gains and loss immediately
if a sale lease back falls into the below 10% to 90% range then
defer gains and recognize over the life of lease
What two things make a probable loss contingency
- probable
- reasonably estimated
(must accrue to minimum if a range)
What do you do if the loss in reasonably possible contingency?
Disclose
what do you do for a remote loss contingency?
Nothing
Do you disclose a guarantee
always
Do you accrue a guarantee
always
do you accrue for gain contingencies?
never
Calculate unearned interest income is a sales type lease
Gross investment
- PV of minimum lease payments
- PV of unguaranteed residual value
= unearned interest income
Depreciation on capital lease should use what?
the depreciation of the asset is over its entire estimated economic life.
