Leases

Question 1

Minimum rental PMT

Answer 1

all payments to the lessor over the lease - executory costs

Question 2

minimum lease payments

Answer 2

= minimum rental payments + any GRV or BPO

(excluding executory costs)

Question 3

executory costs

Answer 3

= costs of using the asset (e.g maintenance, insurance or operating costs)

They are DEDUCTED from the minimum lease payments when computing PV

Question 4

incremental borrowing rate

Answer 4

= the rate at which the lesee can borrow from a bank or institution in order to purchase the asset

Question 5

implicit interest rate

Answer 5

the rate used to discount the
minimum lease payments to equal the FMV of the
leased property at the beginning of the lease.

Question 6

guaranteed residual value

Answer 6

Risk of the
lessor’s loss of residual value is transferred to
the lessee

Question 7

ASPE vs IFRS (interest rate)

Answer 7

ASPE:

1. Lessor’s interest rate if known to lessee (implicit)
2. Lessee’s incremental borrowing rate.

IFRS: (you sometimes need to calculate it_)

For IFRS the rate used to discount is the implicit rate if
determinable

Question 8

PMT =

Answer 8

= principal + interest

Question 9

Recording the capital lease for the LESEE

Answer 9

• Liability is recorded at the LOWER of PV of
  minimum lease payments and FMV of leased
  asset. +

- the PV of the lease payments for BRP +

• plus the PV of the GRV or BPO

Question 10

LESSEE => captal lease - end of the year

Answer 10

1. interest expense (liability - payments made) x interest rate (pro-rated if necessary)
2. amortization expense