Int. 2 Exam 2 Ch. 20

lease

an agreement conveying the right to control the use of property, plant, or equipment for a stated period of time in return for periodic payments

lessee

acquires use of property

lessor

gives up use of property

bargain purchase option

a provision allowing the lessee to renew the lease for a rental that is lower than the expected fair rental at the time the option becomes exercisable

estimated economic life of leased property

the estimated remaining period that the property is expected to be useable, regardless of lease term

estimated residual value of leased property

the estimated fair value of the leased property at the end of the lease term

executory costs

normal expenses associated with owning a leased asset, like insurance, maintenance, and property taxes

guaranteed residual value

a provision in a lease agreement that requires the lessee to guarantee that the remaining value of the asset will be a certain amount when returned to lessor (or pay to make up the difference)

initial direct costs

incremental costs incurred by the lessor to originate a lease that would not have occurred if the lease had not been executed

interest rate implicit in the lease

the rate that causes aggregate present value of the lease pmts and unguaranteed residual value to be equal to the fair value of the leased asset

short term lease

<12 months, payments usually expensed as incurred

Sale-leaseback

the original owner sells the asset to another company and immediately leases it back

must be an operating lease

“lease term is 75% or more of economic life”

lease term test

“present value of lease payments is 90% or more of fair value of the asset”

present value test

accounting treatment of finance lease expenses

effective interest method & straight line amortization

accounting treatment of operating lease expense

lease expense (cash payment) - effective interest method = amortization expense

portion of residual value included for classification test

full amount

portion of residual value included for measurement of liability (lessee)

probably amount of payment (difference between expected and guaranteed)

portion of residual value included for measurement of receivable (lessor)

full amount