Leases

Finance Lease vs Operating Lease

It is finance lease if:

1) Ownership is transferred to the lessee at the end of the lease

2) If there is a bargain purchase option

3) Lease term exceed 75% of the useful life

4) PV of the minimum lease payments exceed 90%

5) Asset is of a specialised nature

6) Lessor’s losses borne by lessee upon lessee’s cancellation

7) Gain/losses from fluctuation of residual value accrues to lessee

8) Bargain Renewal Option exists

Journal Entries

Lessor Lessee
Dr Lease Receivable Dr Leased Asset
Cr Asset Cr Lease Payable
Cr Unearned Interest Income Cr Cash (If there are initial direct Costs)

Dr Cash Dr Lease Payable

Cr Lease Receivable
Dr Unearned Interest Income
Cr Interest Income
* Asset is equal to the present value of the
lease payments, BPO, GRV & unGRV
Sale and Leaseback Journal Entries
Dr Interest Expense
Cr Cash
Dr Depreciation
Cr Accumulated Depreciation
* Leased Asset is equal to the present value of
the lease payments, BPO, GRV ONLY
* Depreciable amount will be equal to the
capitalised amount less the guaranteed
residual value

Operating Lease Finance Lease

Selling price – Fair Value: Deferred &
Amortised over asset usage period
Fair Value – Carrying Amount: Go directly to
P/L
If carrying amount is less than the fair value,
write down the asset to its recoverable
amount by recognising an impairment loss.
Selling price – Carrying Amount: Deferred and
amortised on a straight line basis
 Asset is leased back at its fair value

Dr Equipment $Fair Value

Cr Lease Payable $Fair Value

Financial Assets

When bond is sold before the end of financial period, do normal bond amortisation except adjust it
based on the number of months before disposing it.

Financial Liabilities

* If there is any transaction cost, reduce the bond value and calculate the new interest rate based on
the reduced bond value.

- When there is an derecognition of bond due to a change of terms, the gain/loss is obtained
compared by comparing the carrying amount with the fair value at that time

Loans to subsidiary, parent company & staff (Seminar 9 Outline)

Parent to subsidiary

Parent – Dr Investment in Subsidiary

Subsidiary – Cr Capital Reserve

Subsidiary to Parent

Subsidiary – Dr Capital Reserve

Parent – Cr Investment in Subsidiary

Subsidiary to Subsidiary

Parent/Subsidiary – Dr / Cr Capital Reserve

Interest free loan to employee

Parent – Dr Deferred Staff Cost (amortise over straight line)