ACCT 305 Chapter 15

Lessee Classifications

Finance Leases, Operating Leases

Lessor Classifications

Sales-type lease (with/without selling profit), Operating leases

Sales-Type Leases

Agreement specifies that ownership of the asset transfers to the lessee. bargain purchase option is present, lease term is for major part of remaining economic life (75% rule), PV of lease payments equals or exceeds “substantially all” of the fair value of the underlying asset (90% rule), no alternative use to lessor

Debit Lease Payable, Credit Cash (lease payment)

Journal entries for the first lease payment (Lessee)

Debit Cash (lease payment), Credit Lease receivable

First lease payment for Lessor

Effective Rate x Outstanding Balance

Interest expense and Interest revenue amounts are found by

Debit Amortization Expense, Credit Right-of-use asset

Amortization of right of use assets journal entries

Asset/Years

When finding amortization expense, you must

Sales-Type Leases with Selling Profits

Occurs when Fair value of the asset exceeds the cost or carrying value. PV (lease payments) - COGM.

Lessor (Sales-Type with Selling Profit)

When there is a selling profit, all entries other than beginning entry to include selling profit, are precisely the same as without a selling profit

Lessee (Sales-type with Selling Profit)

Not impacted by profit recognition . Journal entries remain the same.

Lessor Entry with Selling Profit

Debit Lease Receivable and COGS, Credit Sales Rev. and Equipment

Operating Leases

Doesn’t meet any finance lease criteria, fundamental rights and responsibilities of ownership are retained by lessor, temporary lessee use, sale is not recorded by the lessor, lease revenue is recorded on a straight-line basis

Amortization Expense (Operating leases)

Annual lease payment - Interest Expense

Lease Expense - Interest Expense

Calculation for amortization expense on an operating lease.

Finance Lease Amortization

Amortization reflects the right to use the asset and the financing of that right (interest expense), straight-line amount

Operating Lease Amortization

Lease expense is recorded in a manner designed to mirror straight-line rental of the asset during the lease term. Lease Payment - Interest Expense

Purchase Option

A provision of some lease contracts that gives the lessee the option to purchase the lease asset during, or at the end of, the lease term at a specified exercise price.

Purchase Option Conditions

Finance/Sales-type lease, lessee and lessor consider the exercise price of the option to be an additional cash payment, lease term ends on the date that the option is to be exercised.

Bargain Purchase Option

a purchase option whose exercise is reasonably certain

Recognize amortization over full year useful life

if the purchase option is reasonably certain, lessee will have the asset for its full year useful life, and thus ___ instead of over the leas term

Debit Interest Expense and Lease Payable, Credit Cash

Journal entry to record exercise of a purchase option by the lessee

Debit Cash, credit Lease Receivable and Interest Revenue

Journal entries to record the exercise of a purchase option as a lessor