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Ch04 Accounting Treatment 2
Ch04 Accounting Treatment 2
Financial Accounting
a. Operating leases.
b. Capital leases:
.without bargain purchase option
.with bargain purchase
option . With
guaranteed residual value
Accounting for Leases 7
Accounting for Leases :(contd.)
The objectives of the chapter include:
a. Operating leases.
b. Capital leases:
.direct-financing leases
.sales-type leases
A company records the asset
purchased and the note payable. A's
financial data show the following
changes:
4. Leveraged lease.
A special three-party lease which is
considered to be a direct-financing lease.
* The asset is amortized over the lease term because the lease
does not include a transfer of ownership or a BPO.
Depreciate to zero due to no guaranteed residual value.
a. 32,923.45-(100,000-20,923)*0.12=23,434
1997:Interest Expense 6,677.17
Obligation 26,246.38
Cash 32,923.45
Depreciation Expense : L. E. 25,000
Acc Depreciation: L.E 25,000
1998:Interest Expense 3,527.54
Obligation 29,395.91
Cash 32,923.45
Depreciation Expense : L. E. 25,000
Acc Depreciation: LE 25,000
Selected account balance at the end of the
lease term:
Obligation (lease payable) = $0
Acc. Depreciation = $100,000
Leased Equipment = $100,000
Journal entry on 12/31/98:
Acc. Depre. 100,000
Leased Equip. 100,000
Accounting for Leases 65
ExhibitA1: Summary of lease payments and
interest expense of Example A1
Payments at End of Year
1-Jan-95 - - - $100,000.00
31-Dec-95 $32,923.45 $12,000.00 $20,923.45 79,076.55
31-Dec-96 32,923.45 9,489.19 23,434.26 55,642.29
31-Dec-97 32,923.45 6,677.07 26,246.38 29,395.91
d
31-Dec-98 32,923.45 3,527.54 29,395.91 0
Total 131,694 $31,694 $100,000
For capital leases, executory costs paid by the
lessee are recorded as operating expenses.
If these costs are paid by the lessor, they
should be deducted from the computation of
MLP.
Accounting for Leases 69
Journal Entries for Example A1- a direct financing
Lease for a Lessor:
The journal entries to record the lease of the
equipment and the receipts of 4 lease
payments for the lessor are as follows:
1996:
Cash 32,923
Lease Receivable 32,923
Unearned Interest 9,489
Interest Revenue 9,489
1997:
Cash 32,923
Lease Receivable 32,923
Unearned Interest 6,677
Interest Revenue 6,677
Accounting for Leases 76
Journal Entries for Example A1-Lessor (contd.)
1998:
Cash 32,923
Lease Receivable 32,923
Unearned Interest 3,528
Interest Revenue 3,528
At the end of the lease term,
lease receivable =0 and
unearned revenue=0.
Equip. 112,635
Leased Equip. 112,635
Conclusion: The lease is a sales-type
lease. Since appropriate criteria are met
and there is a manufacturer's or dealer's
profit.
The amount used as the selling price
($190,008.49) exceeds the cost ($120,000).
That is, the present (fair) value of the lease
payments is greater than the cost of the
property.
Assuming that the York Company (the lessor)
uses the perpetual Inventory system. it
records the information relevant to the lease
as follows:
The journal entries for the next 9 years for the lessor
Capital Leases:
Lessee: reports cash flows for payments toward
interest exp. as cash flows from operating
activities and reports the payments toward the
principal (i.e., lease payable) as cash flows from
financing activities.