F5: Operating Leases

Question 1

Lessee Accounting: Lease Rent Expense

Answer 1

Records rent expense over lease term

Question 2

Lessee Accounting: Lease Bonus (definition too)

Answer 2

• Prepayment for future expenses (example- commission paid to real estate agent)
• Classified as an asset (deferred charge) and amortized over life of lease

Question 3

Lessee Accounting: Leasehold Improvements (definition too)

Answer 3

• Improvement made that is not removable from the premises

- Capitalize and add to PPE

Question 4

Lessee Accounting: Rent Kicker (definition too)

Answer 4

• Premium rent payment

- Period expense

Question 5

Lessee Accounting: Free or Reduced Rent Consideration

Answer 5

Take TOTAL rent for entire lease and divide by number of years to properly take rent expense evenly over the term

Question 6

Leasehold improvements depreciated how:

Answer 6

Over the LESSER of:

• Lease life
• Asset/improvement life

Question 7

Lessor Accounting: Fixed Asset

Answer 7

Depreciate over asset’s useful life

Lessor depreciates, not lessee

Question 8

Security Deposits: IF Nonrefundable

Answer 8

• Deferred by lessor (unearned revenue) and

- Capitalized by lessee (prepaid expense) until lessor considers deposit earned

Question 9

Security Deposits: IF Refundable

Answer 9

• Liability by the lessor and

- Receivable/asset by the lessee until deposit is refunded

Question 10

With a free/reduced rent consideration, Rent expense (if lessee) or rent income (if lessor) do what?

Answer 10

They stay the same amount no matter what period (so if it’s in the free period or not)

Question 11

Trick to remember with nonrefundable deposits:

Answer 11

Only recognize as revenue when fully earned, and not in advance

Question 12

Sale-Leaseback Transaction: If Substantially All Rights Retained, what to do with a gain resulting from the sale?

Answer 12

Defer all gains and amortize

Question 13

Sale-Leaseback Transaction: If Rights Retained are within 10% - 90%, what to do with a gain resulting from the sale?

Answer 13

Defer all gains up to the present value of the minimum leaseback payments

Question 14

Sale-Leaseback Transaction: If Minor portion of rights retained (<10%), what to do with a gain resulting from the sale?

Answer 14

Recognize gain at the time of sale; do not defer

Question 15

If first payment due at time of lease, what is not included in payment?

Answer 15

Interest expense (it’s just principal)