Assignment on “Accounting for Leases” Course Title: Financial Accounting - 2 Course Code: 204 gO a Submitted to: Ms. Tanjila Hossain Assistant Professor Department of Accounting & Information Systems Submitted by: Avijit Dutta Shaon ID: 1836; Semester: 3" Department of Management Studies. Jahangirnagar University Savar, Dhaka. Date of Submission: 9” January, 2020. Scanned with CamScannerAcennting ton Leases 1. The magne \esson Aoups ore banks cap tye Leasing Qompanies and independents. Captive sean cornpanies have dhe point ot sale advantage Im ak Leasing qustomens! that is, as S00” as a ipanent neceives a possible onden,a lease fi- Nomeing &rtnangement ean be developed ‘by its Leasing subsidiany. Funthenmone, the eaptive Lesson has the product knowledge which gir i+ on advantage when financing the panents ‘product. The euanent -bnend is Jor captives to focus on the company’s products rather the ty do general ease financing s. R.0) Possible advantages of Leasing " ray Leasing permits dhe write -o}} ot the full cost ok the assets (ineluding ong dand and ne. sidual value) Haus prosiding a possible tax Scanned with CamScanner| | ly Possible disadvantages of Jeasing: Tn an esen-ineneasing inflationany eco- omy , retaining tithe +o assets may be aesinable as a hedge against inflation. t Inkenest sales fon Seasing olen ane Wighen ond a profit treton ded in additon. & In aes may be inelu- Some uses, owning dhe asset Pow wnique tax advantages. sueh as when | bonus depreciation | is penmitled. =) Since Nong- fonm non-cancelable hease i which is used as a financing device genene. ity rresulls in the capita lication. of the leased assets and recognition of the Lease commit “ment in the statement of financial posititn the companative elfect is spot Veny did fen. ent Jrven pun clase and ownentslyp: Saests Scanned with CamScannerddvantage . |B Leasing mas be fone fexible in thet the | ease og grcemernt ‘nay contain less mestnictive | prisions than the bond jndentune. % Leasing penmts 4007, tineneing of assets. * Leasing aay penmit mene rapid changes in | Cquipment , reduce the risk of obsodescence | amd pass the niskin residual value to | Khe Sesson on a dind- party, |B Potential of ott. balanee sheet hinancing | wilh eetain Types of heases. | One of We usuch advantage s ot leasing te ibs avai Labikity when othen debt tinanein | | is wnavaikable - | Scanned with CamScanner| a - _ Jeased under such -benms would be capi ta- Nized ot +Ye present value of the futune hease payments ; Nis value is probably some what equivalent +o the pune hase price olr-he assets. Bonds sodd at per wou \d be “means equivalent ts the present value of Ae fulurre Lease payments; in veithen case would jetenest be aap tahized . The amourils presented in the stocement of financial po- sifen would be quite Cornparable as would Kee general chassitications : 4he specifi eta- bels Cheased assets and Lease Sabi tity) would ibe didbenent. D Lessees Wave avaiable two lease aceou ting anethods +a the operating method and » Wve din ance- lease method . Under the operating snethod , Ae leased asset Fremains Scanned with CamScannerhe property of “the Lesson with the pay- ment of a hease rerta t recogmeed Qs ten Anh expense. Crenenally. the Lesson pays the insurance, taxes and maintenance eosts me - fated to the Jensed asset. ‘Under the fine.’ nee hense,method, the lessee treats the Jease transaction as if an asset wene being punchased om enedit ,~thenetone ithe lessee: Deets up an asset and a neleated Aiability “ond d ee Cog nizes depreciation of the asset, me. jauelion of +he Niabidit , and jvtenet expen. se. 5) Minimum ewe b Pay ments ‘ane the pemiodie Payments made by WN Jessee ak sweeivel b the Jessort. These payers may inelude exe. ewton y costs (suck as maintenance taxes & Wounenee). Minimum Lease payments ane pay. Scanned with CamScannermeats rtequined on expected +o “be made by 4ue Nessee. They include mini murn newtal pay. ments (ess exeeutony costs), a bargain pure chase oplion, a guaranteed nesiduad value and penalty for Jailune to menew the Lee 1S The present value ofthe minimum Lease pay me nts is capitulized by the lessee. 2 Whe distinction between a dinee} dinanein hease and a sales type Lease isthe pre- sence om absence of & marufactunen’s on dealer's profit . f sales ‘ype Jease jmalves 4 mantochunen's ort dealer's paogit and a dine Hinaneing Lease Aves not. The profit isthe ddfenenee behseen the fain value ohthe -Lea- sed prtopechy at the inception of +he lease and Ehe seasons cost on canaying value. Scanned with CamScannerY Vndex the operating metled ,a nen} expen. Se atenues dey by day ty the Lessee asthe property is used - The essee assigns rte wt ty The periods bene fi ting from the use of the asset and formes in the accounting any Com, itments fo make dudune Payments - App ro pri ate aconuals ane made if the — aceowrh'n ipenied ends betieen cash payment dates. 2) Under the finance-Lease method, the fess. jee treats the lease Anansachons asif $he asset} were being punclased on an ins. ltallmewt basis Sa dinanoiad transaction in why. eh an assets 5 dequined and a Liability is onested . Whe asset and the Aiabidity ane sh_ ted inthe Jessee’s statement! of finanera/ position atthe Lowen of 3 d-the preserrt value of the mintnum tease pay ments (excluding Scanned with CamScanner| | iship on Contain 4 bargain ~ purchase 0 phe Awe Leased assetis amentized ove nthe Lex \se team. ') From the standpoint of the Lesson leases “nay be classitied | ton accoustting Pus pose s am cdassihied a 5! a) ope necting eases , b) dineetfi- noneing eases and ¢) sales hype Neases- Fron the standpoint of Jessons , leases ane ela. ‘eked as hinance Leases it they meetin, om moste of -the followin oun enttemia? Th The Lease treamtens ownership of the Property to he Lessee. Th The Lease contains o bangain- purchase option. BH The Lease team is forthe anajon part of The econmia fe Mite of the assed, Scanned with CamScanner“The preset yelue of the wafaiven lease Pay meats armouts ty substantially all of the tain Nolue of the Leased osset. Finance Leases ane classified as dinect- finane in deases on sales +4 pe eases + ALL othen Leases jane ohassitied as opecackn Leases» The distin. ton Jon the Lesson bebveen a dinect oh meine Ging dense and « sales type Jease isthe Presence a alsence of a manu fachaens 6x dealen’s profit on Joss. ty) tb the lease transaction selisties the “NRL SATA onitenia te be ehassi fied as a dinect Kimneing hease, the lesson reeonds @ lease Receivable” ton the Leased asset. The Lease re. ceivable ts the present value of he manimun ease Payments. Minimum dease payments inelude lhe rental payments (exeluding execu. Scanned with CamScannertong costs), bastgain - purchase ion, guaran steed residual value (itary) and penalty for Feiune +o renew G+ any) In additon the present yolue of the ungu carted mesidual value must also be included. Me ease re- ceryable is then accounted lon simitan td a note neceivable using the etfeetive iarte. mest method. 44) Under the ope rating method, each newt receipt of the fesson fs meeonded as nevital nevenne on the use ofan tem canmied asa xed aset) The Hxed asset is depreciated ;, he ~ronrnak manmen, wth the deprecicton 6% pense nteognized im the same pemiod asthe nen Joh revenue . The amount o newenue mecranized in eack aceousting period fs equivalent te +the amount of gent pent neceiyable aceonding tothe Scanned with CamScannerpritvisions of the dease. tn additionto the depreciation change, smaintenanee Costs andthe cost of any othen senvices teendened undeg Khe provisions of the Lease that perthin to Ake cunsent gecourting peniod ase changed against dhe necognized nevenue. 15)a) Tne Lessee's accounting ton a Lease white an ungwrcen teed nesiduad valueisthe pane as the aceaurtting fore a Lease wilt no Fresiduah yalue in tenms ofthe computation of ee minimum Nease payments and the eapj- ltalieed value of Hye Leased assetand the ease dbhigaction «Tat is, ung uanarnteed residual I saluess ane not ineluded in the lessee's minj. mum hease payments» DN guaranteed residual yalue affects the Jess ees corp ut obfe-n of tye minimum Nease Scanned with CamScannerPayments and the capitalized amount of Ake Neased asset and the tease Liability The copitatized xalue is afdected initially by the presence ok a guaranteed tesi- duah yalue since the present value ofthe dease obligation is now made up tuo Componen. ts athe periodic Jease payments and the guanarteed nesiduah value. The amosttza- tion of the lease Nabi tity wikh resultin a lease Ji ability balaree atthe end of the Resse period bic is equal to the g vara. wleed residual value. HA &QThe amount to be neaovened by the Nesson is the same whetken the nesiducl Nalue js guanariteed on Unguananteed. Thene— Kone, the amount ofthe pemodie Lease Pay~ ment sas sot by the Lesson isthe same whether MWe residual value is guaranteed onun. Scanned with CamScannerquanante ed. 49) LL a bargain purchase ophon exists, the dessee must inenease the present value of We sninimam iease payments by the present value ot the option pret. ft bangain-purcele. Se opiion also atlects the depreciable Life ok the heased asset sine the Lessee must ldepneciate the asset over its econome Life rothern than the tenm of the Lease. Ty the | hessee tails fo exencise the option, the fe. issee will mecogmiz e a hess tothe extent af Hye net bork value othe Leased asset im he pemiod that option expined, 4s) Initial indineet costs anethe inenemertel loosts in eunned by Khe Nesson that ane dineely asspticted with negotiating , tensummeting and i-ni Hall y prrece ssing Leasing Araasaeyowits re Scanned with CamScanneropensting Leases, the essen should defox initia kh adinect edsts and allocate them oven the Lease team jn proportion to the Tee gn; tion of nentad Mevenue In a sales ~lype Jease tnansachon, Lhe lesson ex penses the inthal dmeet costs in the yean of meunnen- CRs Tm a dinect Lnaneing Lease, Initial di- meet eosts chould be added to the ne}: inves. ment jn the Lease end amontized oven the Jide ofthe Lease as a gield adjust ment. 19) lessees and Lessons should diselose tHe dulune minimum cental Payments nequined as othe date of tye hates! datement: offi cnancial positon presented jin the agg negate, and Son the neat year don gears 25 and ~Heneatten. Scanned with CamScannerProb Lems PR —— 9 Wis o Jinanoe ease be Jensen since | We Lease tenm is greater than 75% of Mie econsme dite of the leased asset. The hease team is 9% (45) st the assets econo - mie dile. Mis is 4 Jimanee Jease to brlause because dhe Lease tena ig g eaten Hien #57 ofthe assels eesnomie Nite. Sinee Lhe tei value Gay) oh the eyvipment exceeds the Jessen cost (E5000) the Lease ts a sales type dease. } Calerlotion of amnual newlad Payenent : EWI - (Clow x 5 131¢)* ee = ElMN38 + Present yalue of €4 ot any. ton # peteds ad ba Nolue of on e-amuity ot dof, don x Scanned with CamScannerlo Computation ot present value of minim Lease Payments * PY of annua 4 payment SS El30x5, 23054E EC 33574 ey of guaranteed stesidual yalue + loro x. 4916C! usicc -€telyd 4 Present yolue of an annuity due at 117, fon periods #% Present value of E47 at 4417 ton Z peniods. 4 4]i}is Leased Equipment 63 47u4 Lease Liability 631344 Lease Niebidsty 421130 Cask 124430 tepijis Depreciation expense 33106 Aeeumutl ated deprceintn Equipment) $3106 Ee 54744 - €lovyon):7 Talenest expense C4667 Initenes} payable 61667 (Cota 44 € 9113 0)x 44 Scanned with CamScanner4a)a}ae \ease Niabi dil 59 HES Jalenes) Pay able Gt ted Cash lela ' 1 a}sa}ic Hepiteci ation expense Hale Necumuleted depreciation Flue Cleased Equipment) Tote nest expense 55136 Tatenest piyabl e GElo¢ [Ce Ca4944 _ E121130~ EEG KUT € 1/4/45 Vease Reoelwh te 7 Goove Cos) | (rads Sot PR 504 Sales Beve Aue fauna Laveatony Fara, Qask jel nra Wren Were civ ble felling w)s}y —— daakraes) woorlvabde Bde? ‘1 nleae \ Wee ne bi yaa [Ce avunon lel auto] Scanned with CamScanneri}a}ic Cash $RI120 Lease Receivable C3243 Trheaes} Receivable 57 siz i2]31) 4c ‘Trtenesd Reoeivabl e 51563 Valens] Revenue 515¢3 \€E Puocuw~ CPM ze - ECB a)¥ ob] Ped ® We Lease is an operating lease tothe Aeassee ond hesson because: TH th does not dnansden ounens hip H 1 does ned contin o bangain - purchase option Th 1 does not coven dhe mayen pant (at leas) +5) oh the estimated economic Life of the erane and ‘ th The pre sertl qalue of the Lease payments does not amount to substantially all (at Jeast 90%) of Whe fain value of Hye eased cram Scanned with CamScannerRE33ev0 Anmal ease Payments X Pv of oomuity due at 9% tor 5 geans R 433009 XK W.23992- R$A3991076, whieh is Lessthan REACCTV. oo (So/ X RFVYOOTD. 0D) AY Neast one of the four enitenia would Lave ‘Yad to be .sohishea fon the lease tobe classified as other than an o penating Lease » ») Lessee’s Extnies Rent Expense 33000 Cash 33 600 Aesons_Evinies Tnsunanee Expense hoo Tar Expense 2000 Maintenance Expense 650 Cash of flocourts Payable 3150 Scanned with CamScannerDepnee: ation Expense 15}50 fleeumulated Depreciation 13750 (Leased Equipment) T@s 2H evr ~ RF15600)512] Cask 33 OUD Rewt Revenue 33 oy ® Abriendo as hessee must disclose inthe ines mestolemen| Lhe R$33000 of res! expense and in Whe notes the Julune minimum menhd pay. omer $ rrequined as of Vanuany 4 Gntohl, eg 139000) and fon the next year (2016 ~ R$33an) ond yeans 2-5 (8 $99 ov). Nothing nesative to AAese Lease would ® ppeart on the Lessee’s statement ot tinanciad position. Comeunas Lesson mus} disclose in the slate. ment of Jinanciah position on inthe notes the eodol She Leased errane (24240000) Scanned with CamScannerand Aye accumulated depreciation ot R55 sepenalely | rom assels mot eased Additye mally Caneun must disclose inthe asles the minimum Future «2 mtads as a total of padaanco, and fon the next gean (20)6-Rg 330un) amd geans 2-5 (RESIN) Ne ineome stetement ton the Lessor nepon- +5 meat mevenue and expenses ton insu- rane e, fares, amaintenanee and de preciatis y Capense> PU-3 a) The dease should be Anected asa Jinanee Lease by Labnon industries mequining the Lessee +n capitation Lhe teased asset: The hease qualities fon dinonee Aease «ceourtn by She Sessee beaause : 4) tithe tothe eny. snes Ananslerts to fhe Lessee, a) the Lease Scanned with CamScannerteum is e quad to the estimated dite ok tke asset and 3) +he present value of Sue vninimum ease payment > execeds 907. of he Jain value of the deased engines: The Anansachion represents a punclase finan aed by installment payments overt a 1o- Geant pemiod - Fan Ewing Tne. Mye transaction isa séles Nee Lease benause o manu-factunen's Pro. | Sib acenues to Ewing - This Jease annange- ‘ment also nepresents Ane manutactunens Kinoneing dhe Anamasacton “ayer a pemiod of Av yeons: 9 | FUIZIFA & 7. 24689* $3 0vpor0 | # Present value of on amnui ty due-at 17 | Fon 40 yearns, nounded by $2 Scanned with CamScannerDede Prodit Sales (exesentt yalue ot dease pry meas) $3an00vo Less cost of engines 2 coum Prolit on sale $4 sora ) Leased Equipment Soyo Gey Lease Li abidity 3 ou O00 ) Lease Receivable 3 Svs OND Costot Goods “Sold Wor ory Sales Revenue 3 SQoOT Toventarey 2 6 arcu 4) Lessee Lease Lisbitity 41 3974 Cask ui3971 Lesso x Cash U3 974 Lease Receivable ud 3974 Scanned with CamScanner9 LABRON INDUSTRIES Lease Amorr| teation Se hedule f\anua! Lease Recei pl/ date is Whis \pific VOTE 1395] 41393) 41393] Lessee | Tate nest Tutenes) Lesson | Tntenest Intenes}- Jashe nes] on Ragas Renee i 20 &IF \96 315 Expense Payalo\ e Reoeiyable Ravenue \e ase Reduction nan: ily Recut lbily / 3 ovsovo L397) 2576029 QOEOII = °BFHIy 823656 155g y 20 65% 9 2063 ¥2 2oCVse 20C8ss Scanned with CamScanner9 LABRON INDUSTRIES Statement of Financial Position —_____ Dewemben 31, 2015 Property, Phantt Nom eurnent Mtebilites ? \2 Equipment Lease Avability $237ssy3" Leased Property $ 360000 Cc uanent Mabilebies: Less a ceurnulated depreciation | Leased equipred = 3000" Jotenest Payable 20K432 Lease Liability 20z0¥s* | F3000670 + (o-$3000m | #* No pontion of this amount pard ubihndhe net gern a4 CE4Is994 - g2octss) Note: The fi}le obli gations under di. | ce Meases is often used sated of Lease Labidity, Scanned with CamScannerEwin INe. heheme nt of Financial Position Decemben 31, 2015 fesele Noncunnent asseks: Lease neceivab se $eazsyd Cunnent assets : Tate nest neeenabte 206 332 Lease nceewable 207089 % See balance on tomo ntiaochi gn schedule at ihe. 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