Lessee Accounting:

1. Operating Lease:

• Lease Payments: Lessees make periodic payments for using the asset.

• Expense Recognition: Operating lease expenses are recognized evenly over the lease term.

• Journal Entries:

• Each lease payment: Debit Lease Expense, Credit Cash.

2. Finance Lease:

• Criteria for Classification: A lease is classified as a finance lease if it meets specific criteria, such as transferring ownership at the
end of the lease term.

• Recognition of Leased Asset and Liability:

• Lessees recognize the leased asset at the present value of future lease payments.

• The corresponding liability is also recognized.

• Amortization of Leased Asset:

• Leased assets are amortized over their useful life.

• Interest Expense on Lease Liability:

• Lessees incur interest expense on the lease liability.

Lessor Accounting:

1. Operating Lease:

• Lease Income Recognition: Lessor recognizes lease income evenly over the lease term.

• Journal Entries:

• Each lease payment: Debit Cash, Credit Lease Income.

2. Finance Lease:

• Criteria for Classification:

• Sales-Type Lease: The lessor sells the asset to the lessee.

• Direct Financing Lease: The lessor provides financing without selling the asset.

• Recognition of Lease Receivable and Unearned Interest Income:

• Lease receivable is recognized at the present value of lease payments.

• Unearned interest income is recognized.

• Cost Recovery and Profit Recognition:

• The cost of the asset is recovered, and profit is recognized over the lease term.

Presentation and Disclosures:

• Lessee's Financial Statements:

• Balance Sheet: Recognize lease liabilities and right-of-use assets separately.

 • Income Statement: Reflect lease expenses.

• Cash Flow Statement: Classify lease payments as financing activities.

• Lessor's Financial Statements:

• Operating Lease: Lease income presented as operating income.

• Finance Lease: Recognition of lease receivables, interest income, and selling profit.

Changes and Disclosures:

• Changes in Lease Terms:

• Adjustments to lease liability and right-of-use asset for changes in terms.

• Disclosures:

• Nature of leases, future lease payments, and other relevant details in footnotes.

1. What are the key differences between operating leases and finance leases?

Answer: Operating leases are similar to renting; the lessee doesn't typically acquire ownership of the asset. Lease expenses are recognized evenly
over the lease term. Finance leases, on the other hand, involve transferring most risks and rewards of ownership to the lessee, and both the asset
and liability are recognized on the balance sheet.

2. How does a lessee account for an operating lease? Provide the necessary journal entries.

Answer:

• Each Lease Payment:

• Debit Lease Expense

• Credit Cash

3. What criteria must be met for a lease to be classified as a finance lease for the lessee?

Answer: The lessee classifies a lease as a finance lease if it meets criteria such as transferring ownership at the end of the lease term or
containing a bargain purchase option.

4. Explain the accounting treatment for a finance lease from the perspective of the lessee.

Answer:

• Recognition of Leased Asset and Liability:

• Debit Right-of-Use Asset (PV of future lease payments)

• Credit Lease Liability (PV of future lease payments)

• Amortization of Leased Asset:

• Debit Lease Expense

• Credit Accumulated Amortization

• Interest Expense on Lease Liability:

• Debit Interest Expense

• Credit Lease Liability

5. How does a lessor account for an operating lease? Provide the necessary journal entries.
Answer:

• Each Lease Payment:

• Debit Cash

• Credit Lease Income

6. What are the criteria for classifying a lease as a sales-type lease or a direct financing lease for the lessor?

Answer: A lease is a sales-type lease if it results in a profit, and a direct financing lease if it doesn't but provides financing. Criteria include
collectability, uncertainties about costs, and the nature of the asset.

7. Discuss the disclosure requirements related to leases in financial statements.

Answer: Disclosures include the nature of leases, future lease payments, and significant assumptions used to determine lease assets and
liabilities. Additional details are provided in footnotes.

8. How does the classification criteria differ for lessees and lessors in finance leases?

Answer: For lessees, finance leases involve criteria like transferring ownership or containing a bargain purchase option. For lessors, criteria
include collectability and uncertainties about costs.

9. Provide a step-by-step guide on how a lessee accounts for a finance lease, including the journal entries.

Answer: Refer to the detailed answer for question 4 above.

10. Explain the differences in presentation between operating and finance leases on a lessee's financial statements.

Answer: Operating leases show lease expenses on the income statement, while finance leases include both the right-of-use asset and lease
liability on the balance sheet.

11. Discuss the accounting treatment for a sales-type lease and a direct financing lease from the lessor's perspective.

Answer: In a sales-type lease, the lessor recognizes selling profit immediately. In a direct financing lease, the lessor recognizes interest income
over the lease term.

12. What are the disclosure requirements for lessees and lessors regarding leases in financial statements?

Answer: Disclosures include the nature of leases, future lease payments, and significant assumptions used to determine lease assets and
liabilities. Additional details are provided in footnotes.

13. How are changes in lease terms accounted for, and what adjustments are made to the financial statements?

Answer: Changes in lease terms require adjustments to the lease liability and right-of-use asset for lessees. Lessors adjust the lease receivable
and selling profit for sales-type leases or interest income for direct financing leases.
 Intermediate Accounting (Spiceland) Chapter 15 Summary
Fill-in-the-Blanks Level 1
Study online at https://quizlet.com/_31hitq
Leasing is used as a means of ___ as well as achieving opera-
financing assets
tional and tax objectives.
Leasing is used as a means of financing assets as well as achiev-
operational
ing ___ and tax objectives.
Leasing is used as a means of financing assets as well as achiev-
tax
ing operational and ___ objectives.
In keeping with the concept of ___, a lease is accounted for as
either a rental agreement or a purchase/sale accompanied by substance over form
debt financing.
In keeping with the concept of substance over form, a lease is
accounted for as either ___ or a purchase/sale accompanied by a rental agreement
debt financing.
In keeping with the concept of substance over form, a lease is
a purchase/sale accompanied by debt financing
accounted for as either a rental agreement or ___.
A lessee should classify a lease transaction as a ___ if it is
noncancelable and if one or more of four classification criteria are capital lease
met. Otherwise, it is an operating lease.
A lessee should classify a lease transaction as a capital lease
if ___ and if one or more of four classification criteria are met. it is noncancelable
Otherwise, it is an operating lease.
A lessee should classify a lease transaction as a capital lease if it
if one or more of four classification criteria are met
is noncancelable and ___. Otherwise, it is an operating lease.
A lessee should classify a lease transaction as a capital lease if it
is noncancelable and if one or more of four classification criteria it is an operating lease
are met. Otherwise, ___.
A lessor records a lease as a ___ or a sales-type lease only if
two conditions relating to revenue realization are met in addition direct financing lease
to one of the four classification criteria
A lessor records a lease as a direct financing lease or a ___ only
if two conditions relating to revenue realization are met in addition sales-type lease
to one of the four classification criteria
A lessor records a lease as a direct financing lease or a sales-type
two conditions relating to revenue realization are met
lease only if ___ in addition to one of the four classification criteria
A lessor records a lease as a direct financing lease or a sales-type
lease only if two conditions relating to revenue realization are met one of the four classification criteria
in addition to ___
In an operating lease the ___ are accounted for as rent revenue
periodic rental payments
by the lessor and rent expense by the lessee.
In an operating lease the periodic rental payments are accounted
rent revenue; rent expense
for as ___ by the lessor and ___ by the lessee.
In a ___ the lessee records a leased asset at the present value of
capital lease
the minimum lease payments
In a capital lease the lessee records a leased asset at the ___ present value of the minimum lease payments
A capital lease is recorded by the lessor as a ___ or direct
financing lease, depending on whether the lease provides the sales-type lease
lessor a dealer's profit.
A capital lease is recorded by the lessor as a sales-type lease
or ___, depending on whether the lease provides the lessor a direct financing lease
dealer's profit.
A capital lease is recorded by the lessor as a sales-type lease or
whether the lease provides the lessor a dealer's profit
direct financing lease, depending on ___.

sales-type lease

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 Intermediate Accounting (Spiceland) Chapter 15 Summary
Fill-in-the-Blanks Level 1
Study online at https://quizlet.com/_31hitq
A ___ requires recording sales revenue and cost of goods sold by
the lessor at the inception of the lease. All other entries are the
same as in a direct financing lease
A sales-type lease requires ___ and cost of goods sold by the
lessor at the inception of the lease. All other entries are the same recording sales revenue
as in a direct financing lease
A sales-type lease requires recording sales revenue and ___ by
the lessor at the inception of the lease. All other entries are the cost of goods sold
same as in a direct financing lease
A sales-type lease requires recording sales revenue and cost of
goods sold by the lessor ___. All other entries are the same as in at the inception of the lease
a direct financing lease
A sales-type lease requires recording sales revenue and cost of
goods sold by the lessor at the inception of the lease. ___ are the All other entries
same as in a direct financing lease
A sales-type lease requires recording sales revenue and cost of
goods sold by the lessor at the inception of the lease. All other in a direct financing lease
entries are the same as ___
A ___ is included as a component of minimum lease payments
for both the lessor and the lessee. The lease term effectively ends bargain purchase option
when the BPO is exercisable.
A bargain purchase option is included as ___ for both the lessor
and the lessee. The lease term effectively ends when the BPO is a component of minimum lease payments
exercisable.
A bargain purchase option is included as a component of mini-
mum lease payments for both the lessor and the lessee. The ___ lease term effectively ends
when the BPO is exercisable.
A bargain purchase option is included as a component of mini-
mum lease payments for both the lessor and the lessee. The lease when the BPO is exercisable
term effectively ends ___.
A ___ is included as a component of minimum lease payments for
both the lessor and the lessee. An unguaranteed residual value is lessee-guaranteed residual value
not (but is part of the lessor's gross investment in the lease).
A lessee-guaranteed residual value is included as a ___ for both
the lessor and the lessee. An unguaranteed residual value is not component of minimum lease payments
(but is part of the lessor's gross investment in the lease).
A lessee-guaranteed residual value is included as a component
of minimum lease payments for both the lessor and the lessee.
unguaranteed residual value
An ___ is not (but is part of the lessor's gross investment in the
lease).
A lessee-guaranteed residual value is included as a component
of minimum lease payments for both the lessor and the lessee. An lessor's gross investment in the lease
unguaranteed residual value is not (but is part of the ___).
Executory costs are expenses of the ___. lessee
initial direct costs are ___ in accordance with the matching prin-
expensed
ciple.
initial direct costs are expensed in accordance with ___. the matching principle
___ are expensed in accordance with the matching principle. initial direct costs
To find the present value of minimum lease payments to capitalize
as an asset and liability, the lessee usually uses a discount rate the rate implicit in the lease agreement
equal to the lower of ___ and its own incremental borrowing rate.

To find the present value of minimum lease payments ___, the

to capitalize as an asset and liability
lessee usually uses a discount rate equal to the lower of the rate

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 Intermediate Accounting (Spiceland) Chapter 15 Summary
Fill-in-the-Blanks Level 1
Study online at https://quizlet.com/_31hitq
implicit in the lease agreement and its own incremental borrowing
rate.
To find the ___ to capitalize as an asset and liability, the lessee
usually uses a discount rate equal to the lower of the rate implicit present value of minimum lease payments
in the lease agreement and its own incremental borrowing rate.
To find the present value of minimum lease payments to capitalize
as an asset and liability, the lessee usually uses a discount rate
its own incremental borrowing rate
equal to the lower of the rate implicit in the lease agreement and
___.
___ are not included in the minimum lease payments because
Contingent rentals
they are not determinable at the inception of the lease.
Contingent rentals are not included in the ___ because they are
minimum lease payments
not determinable at the inception of the lease.
Contingent rentals are not included in the minimum lease pay-
not determinable
ments because they are ___ at the inception of the lease
Contingent rentals are not included in the minimum lease pay-
at the inception of the lease
ments because they are not determinable ___
A ___ in a sale leaseback arrangement is deferred and amortized
gain on the sale of an asset
over the lease term
A gain on the sale of an asset in a ___ is deferred and amortized
sale leaseback arrangement
over the lease term
A gain on the sale of an asset in a sale leaseback arrangement is
deferred and amortized over the lease term
___
The lease portion of a sale leaseback arrangement is __ like any
evaluated and accounted for
lease.
The lease portion of a sale leaseback arrangement is evaluated
any lease
and accounted for like ___.
The ___ of a sale leaseback arrangement is evaluated and ac-
lease portion
counted for like any lease.
The lease portion of a ___ is evaluated and accounted for like any
sale leaseback arrangement
lease.

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