Class Overview

The class has a busy agenda today and will build upon previous lessons.

Recap of Last Week's Material

• Reviewed the calculation of lease liability: $42.06 50 (present value of the lease payments).

• Understanding of amortization, including noncurrent vs. current assets and expenses related to lease liabilities.

• Constructed journal entries relevant to the lease liabilities, operating expenses, amortization, and interest expenses.

Key Concepts in Lease Accounting

• Lease Liability Components:

  • Operating Expense

  • Amortization Expense

  • Income from Operations

  • Interest Expense

• Assumption Changes in Lease Calculations:

  • If the lessee expects a residual value of $3,500 instead of $10,000, this alters the financial calculations significantly.

  • Difference: $10,000 - $3,500 = $6,500 expected cash flow.

  • Emphasis is placed on using a percentage of the guaranteed residual value (GRV) in calculations to accurately reflect expected returns.

  • The lease liability is computed using the $6,500 expected cash flow for accurate journal entries, crucial for reflecting the true financial standing.

Journal Entry Computation

• Cash Flows:

  • Lease liability equals the present value of cash flows (i.e., lease payments). Previous calculations stood at $42.06 50 but did not incorporate the GRV.

  • Present value of expected cash flows re-evaluated, resulting in an additional $47.78 to add to the lease liability, which ensures accurate representation in financial statements.

  • New total lease liability: $42.06 50 + $47.78 = $47428.

  • Beginning period carrying value affects interest calculation through the effective rate, impacting future financial forecasting.

Amortization Schedule Detail

• Amortization and interest calculations must be revisited based on new residual values:

  • Amortization of the Right-of-Use Asset (RUA) recalculated over the lease term of 4 years, ensuring that expenses properly match revenues during the period.

  • The updated amortization schedule helps accurately project future lease expenses and their impact on profit margins.

Bargain Purchase Option (BPO) Information

• If there is a bargain purchase option, the guaranteed residual values should be ignored in calculations to prevent inflated asset valuations.

• This alters the financial predictability, as the BPO can offer significant purchase flexibility at the end of the lease term.

Lessor Accounting Principles

• The lessor will account for payments received and recognize lease receivables instead of liabilities:

  • Example: Annual payment of $10.02 54 represents cash inflow for the lessor.

  • The lease payment is reflective of the fair value of the leased item, ensuring that assets remain accurately valued on the balance sheet.

  • Pivotal details in sales-type leases emerge where the carrying value differs from fair value, indicating profit realization.

  • The loss of the asset from lessor's books means recognizing cost of goods sold (COGS) reflecting this profit and showcasing income generation strategies.

Income Statement Entries

• To ascertain profitability, determine revenue and expense from both sides (lessee and lessor):

  • Example calculations for COGS and gross profits illustrate the transactional nature of the lease, helping identify key cost structures in financial performance.

Total Lease Expense Calculation

• Lease payments must incorporate both principal and interest portions for accurate financial statements.

  • Knowing how these payments break down aids in aligning interest revenue and lease receivables for clear reporting.

Operating Leases & Deferred Tax Accounting

• Operating leases require a total lease expense showing payment, minus interest portion being equal to asset amortization.

• Recognizes the need to differentiate between fixed and variable payments under different agreements to ensure accurate tax reporting.

Summary of Tax Terms and Treatment of Assets

• Discussion on temporary differences, deferred tax assets and liabilities, and the impact of these on taxable income is critical.

• Understanding underlying assets and liabilities regarding future tax attributes is essential in tax computations, as it affects future financial obligations and reports.