Wiley CPAexcel Exam Review 2014 Focus Notes: Financial Accounting and Reporting

Focus on: Leases—Module 13

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 two criteria) ...