intermediate accounting（赖红宁）4-4--ch20

1,Accounting for Leases,C,hapter,20,An electronic presentation by Douglas Cloud Pepperdine University,2,1. Explain the advantages of leasing.2. Understand key terms related to leasing.3. Explain how to classify leases of personal property. 4.Account for a lessees operating and capital leases.5.Understand disclosures by the lessee.,Objectives,Continued,3,6.Account for a lessors operating, direct financing, and sales-type leases. 7.Understand disclosures by the lessor. 8. Explain the conceptual issues regarding leases. 9.Understand lease issues related to real estate, sale-leaseback issues, leveraged leases, and changes in lease provisions (Appendix).,Objectives,4,Advantages of Leasing from Lessees Viewpoint,Financial benefitsRisk benefitTax benefitFinancial reporting benefitBilling benefit,5,The lease provides 100% financing, so that the lessee acquires the asset without having to make a down payment.The lease contract contains fewer restrictive provisions and is more flexible than other debt agreements.The leasing arrangement creates a claim that is against only the leased equipment and not against all assets.,Advantages of Leasing from Lessees Viewpoint,6,Advantages of Leasing from Lessees Viewpoint,Companies A and B have identical financial data:Current assets$2,100,000Noncurrent assets2,900,000Current liabilities1,000,000Noncurrent liabilities1,600,000Stockholders equity2,400,000,Continued,7,Advantages of Leasing from Lessees Viewpoint,On December 31, 2004 Company A purchases equipment with a 10-year life, at a cost of $2,825,112, by signing a 10-year, 12% note requiring $500,000 to be paid at the end of each year beginning December 31, 2005.,The ratio of debt to stockholders equity would increase from 1.08 before acquisition to 2.26 after acquisition.,Continued,8,Advantages of Leasing from Lessees Viewpoint,On December 31, 2004 Company B leases identical equipment to that leased by Company A, agreeing to pay $500,000 rent each year for the next 10 years. Assuming 12% interest, the present value of the lease is $2,825,112 ($500,000 x 5.650223). The acquisition is treated as an operating lease.,9,Key Terms Related to Leasing,Bargain purchase optionBargain renewal optionEstimated economic life of leased propertyEstimated residual value of leased propertyExecutory costsFair value of leased propertyGuaranteed residual valueInception of the leaseInitial direct costs,Theres more.,FASB Statement No. 13 as Amended defines a number of lease terms.,10,Interest rate implicit in the leaseLease termLessees incremental borrowing rateManufacturers or dealers profit or lossMinimum lease paymentsMinimum lease payments receivableUnguaranteed residual valueUnreimbursable cost,Key Terms Related to Leasing,11,Key Terms Related to Leasing,Become familiar with these terms. They are critical to discussing leases.,12,Classification of Leases Involving Personal Property,Column AA.The lease transfers ownership of the property to the lessee by the end of the lease term.B.The lease contains a bargain purchase option.C.The lease term is equal to 75% or more of the estimated economic life of the leased property.D.The present value of the minimum lease payments is equal to 90% or more of the fair value of the leased property to the lessor.,Criteria applicable to both lessee and lessor.,13,Classification of Leases Involving Personal Property,Column BA.The collectibility of the minimum lease payments is reasonably assured.B.No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease.,Criteria applicable to lessor only.,14,Classification of Leases Involving Personal Property,A capital lease meets one or more of Column A criteria.,An operating lease does not meet any of the Column A criteria.,Classification by the Lessee,15,Classification of Leases Involving Personal Property,A sales-type lease must meet one or more of the criteria listed in Column A and both criteria listed in Column B.,Classification by the LessorSale-type lease,It must involve a transaction giving rise to a manufacturers or dealers profit or loss to the lessor.,16,Classification of Leases Involving Personal Property,A direct financing lease must meet one or more of the criteria listed in Column A and both criteria listed in Column B.,Classification by the LessorDirect financing lease,It must not involve a transaction giving rise to a manufacturers or dealers profit or loss to the lessor.,17,Classification of Leases Involving Personal Property,Classification by the LessorOperating lease,An operating lease meets none of the criteria in Column A or does not meet both criteria in Column B.,18,Operating Lease (Lessee),User Company signed a lease agreement with Owner Company whereby User Company agrees to pay $50,000 each year beginning on January 1, 2004 and continuing through January 1, 2008. The lease terms are given in Exhibit 20-4.,19,Operating Lease (Lessee),Exhibit 20-4 Terms and Provisions of Lease Agreement Between Owners Company (Lessor) and User Company (Lessee) Dated January 1, 2004,1.The lease term is 5 years. The lease is noncancelable and requires equal payment of $50,000 at the beginning of each year.2.The cost, and also fair value of the equipment to the Owner Company at the inception of the lease is $300,000. The equipment has an estimated economic life of 10 years and has a zero estimated residual value at the end of this time.3.There is no guaranteed of the residual value by the User Company.4.The Owner Company agrees to pay all executory costs.5.The equipment reverts to the Owner Company at the end of the 5 years; that is, the lease contains no bargain purchase option.6.The User Companys incremental borrowing rate is 12.5% per year.7.For the Owner Company, the interest rate implicit in the lease is 12%.8.The present value of an annuity due (in advance) of 5 payments each at 12% is $201,867 *4.037349 x $50,000 = $201,867.45).,Examine Exhibit 20-4 and determine how many of Group A criteria are met.,Since none are met, this is an operating lease.,20,Operating Lease (Lessee),Classification Criteria Criteria Met? Remarks1.Transfer of ownership at end of leaseNo2.Bargain purchase optionNo3.Lease term is 75% or more of economiclifeNoIt is 50%.4.Present value of lease payment is 90% ormore of fair valueNoThe present value is $201,867.45, or 67% of fair valueDecision: A capital lease must meet one or more of the classification criteria; otherwise the lease is an operating lease.Conclusion: The lease is an operating lease. It does not meet any of the criteria.,Exhibit 20-5 Application of Lease Classification Criteria by User (Lessee),If you incorrectly concluded that it was a capital lease, examine Exhibit 20-5 carefully.,21,Operating Lease (Lessee),As an operating lease, User Company simply records the annual payment as a rent.,Rent Expense50,000Cash50,000,If User Company prepares quarterly interim statements, it reports the unexpired portion of the expense as an asset.,22,Capital Lease (Lessee),The Martin Company (lessee) and the Gardner Company (lessor) sign a lease agreement dated January 1, 2004 that provides for the Martin Company to lease a piece of equipment beginning on January 1, 2004.,23,Capital Lease (Lessee),First, examine Exhibit 20-7 to determine why this is a capital lease. To check your response, click the button in the corner.,24,Capital Lease (Lessee),Initial Recording of Capital Lease on January 1, 2004,Leased Equipment Under Capital Leases100,000.00Obligation Under Capital Leases100,000.00,December 31, 2004,Interest Expense12,000.00Obligation Under Capital Leases20,923.45Cash32,923.45,Continued,25,Capital Lease (Lessee),Recognition of Depreciation, December 31, 2004,Depreciation Expense: Leased Equipment25,000.00Accumulated Depreciation: Leased Equipment25,000.00,Second Annual Payment, December 31, 2005,Interest Expense9,489.19Obligation Under Capital Leases23,434.26Cash32,923.45,The depreciation entry on December 31, 2005 again would be for $25,000.,26,Assume that Martin Company is required to make lease payments in advance on January 1 of each year,.,Capital Lease (Lessee),and that the cost and fair value of the equipment is $112,000.,Present value of four payments of $32,923.45 in advance at 12%,= $32,923.45 x 3.401831= $112,000,27,Capital Lease (Lessee),Initial Recording of Capital Lease on January 1, 2004,Leased Equipment Under Capital Leases112,000.00Obligation Under Capital Leases112,000.00,First Payment in Advance, January 1, 2004,Obligation Under Capital Leases32,923.45Cash32,923.45,Continued,28,Capital Lease (Lessee),Recognition of Depreciation, December 31, 2004,Depreciation Expense: Leased Equipment28,000.00Accumulated Depreciation: Leased Equipment28,000.00,Recognition of Interest Expense, December 31, 2004,Interest Expense9,489.19Accrued Interest on Obligation Under Capital Leases9,489.19,Continued,29,Capital Lease (Lessee),Recognition of Depreciation, December 31, 2005,Depreciation Expense: Leased Equipment28,000.00Accumulated Depreciation: Leased Equipment28,000.00,Second Annual Payment in Advance, January 1, 2005,Accrued Interest on Obligation Under Capital Leases9,489.19Obligation Under Capital Leases23,434.26Cash32,923.45,30,Bargain Purchase Option,Redd Company leases equipment for four years and agrees to pay $2,000 at the end of the fourth year to purchase the asset. Redd is reasonably assured that it will exercise the option. Redds incremental borrowing rate is 11% and the lessors implicit interest rate is 10%. The cost and fair value of the equipment is $128,160.63.,31,The minimum lease payments, based on the lower 10% rate, is calculated as follows:,Present value of the annual payments discounted at 10% ($40,000 x 3.169865)$126,794.60Add: Present value of the single sum of $2,000(the bargain purchase option) discounted at 10% ($2,000 x 0.683013) 1,366.03Present value of the minimum lease payments$128,160.63,Leased Equipment Under Capital Leases128,160.63Obligation Under Capital Leases 128,160.63,Bargain Purchase Option,32,Guaranteed Residual Value,33,Guaranteed Residual Value,Leased Equipment Under Capital Leases,147,284.99,At the end of the lease, both parties agree that the equipment is worth only $20,000.,Accumulated Depreciation: Leased Equip.117,284.99Obligation Under Capital Leases 30,000.00Loss on Disposal of Leased Equipment10,000.00Leased Equipment Under Capital Leases147,284.99Cash10,000.00,34,Guaranteed Residual Value,If the fair value is more than $30,000, the lessee pays the liability in full by returning the asset to the lessor.,35,Disclosure Requirements for Lessee,Exhibit 20-11 provides the disclosure requirements for a lessee.,36,Lessors Classifications,Operating leaseSales-type leaseDirect financing leaseLeverage lease,A leveraged lease is a special three-party lease that is always considered to be a direct financing lease.,37,Operating Lease (Lessor),Owner Company leases a piece of equipment to User Company for five years. User Company agrees to pay $50,000 at the beginning of each year. Owner Company purchased the equipment for $300,000. The equipment has an estimated life of 10 years and Owner Company uses straight-line depreciation. Owner pays the annual insurance premium of $2,000, and on December 15, 2004 it pays for repairs of $1,500.,Why is this an operating lease?,None of the criteria in Column A (Exhibit 20-2) were met; therefore, this lease should be treated as an operating lease.,38,Operating Lease (Lessor),Purchase of Equipment to Be Leased on January 1, 2004,Equipment Leased to Others 300,000Cash (or Accounts Payable)300,000,Collection of Annual Payment on January 1, 2004,Cash50,000 Rental Revenue50,000,Continued,Payment of Annual Insurance Premium, January 10, 2004,Insurance Expense2,000 Cash2,000,39,Operating Lease (Lessor),Payment of Repairs on December 15, 2004,Repair Expense 1,500Cash 1,500,Recognition of Annual Depreciation, December 31, 2004,Depreciation Expense: Equipment Leased to Others30,000 Accumulated Depreciation: Equipment Leased to Others30,000,40,Direct Financing Leases (Lessor),Under a direct financing lease, the lessor “sells” the asset at no gain or loss. The net amount at which the lessor records the receivable must be equal to the carrying value of the property.,1.The undiscounted minimum lease payments to be received by the lessor (net of executory costs paid by the lessor) plus2.The unguaranteed residual value accruing to the benefit of the lessor.,The gross receivable of the lessor includes the sum of-,41,Direct Financing Leases (Lessor),Gardner Company leases equipment to the Martin Company for four years. The lease is noncancelable and requires equal payments of $32,923.45. This equipment cost Gardner $100,000. There is no guaranteed residual value. Martin agrees to pay all executory costs. The equipment reverts back to Gardner at the end of four years. Martins incremental borrowing rate is 12.5%, while Gardners is 12%. Martin Company uses straight-line depreciation. All requirements for Column B are met.,42,Direct Financing Leases (Lessor),It is a direct financing lease because it meets the three requirements: (1) one or more of the items listed in Column A (Exhibit 20-2)Items 3 and 4.,(2) both of the criteria listed in Column B (Exhibit 20-2), and (3) there is no manufacturers or dealers profit.,43,Direct Financing Leases (Lessor),Initial Recording of the Lease on January 1, 2004,Minimum Lease Payments Receivable 131,693.80Equipment100,000.00Unearned Interest: Leases31,693.80,Collection of Annual Payment on December 31, 2004,Cash32,923.45 Minimum Lease Payments Receivable32,923.45,Continued,44,Direct Financing Leases (Lessor),Recognition of Interest Revenue on December 31, 2004,Unearned Interest: Leases12,000.00Interest Revenue: Leases12,000.00,Collection of Annual Payment on December 31, 2005,Cash32,923.45 Minimum Lease Payments Receivable32,923.45,Recognition of Interest Revenue on December 31, 2005,Unearned Interest: Leases9,489.19 Interest Revenue: Leases9,489.19,45,Direct Financing Leases (Lessor),Lets look at a direct financing lease where the payments will be received in advance.,46,On January 1, 2004 the Watkins Company leases equipment that cost $391,371.20 (which is also the fair value) to the Hutton Company. The term of the lease is five years, with annual payments of $100,000 received in advance. The economic useful life is five years. There is no BPO or guaranteed residual value. The lease receipts will yield Watkins a 14% return. The collectibility is reasonably assured, and there are no uncertainties involved in the lease.,Direct Financing Leases (Lessor),47,Direct Financing Leases (Lessor),Initial Recording of the Lease on January 1, 2004,Minimum Lease Payments Receivable 500,000.00Equipment391,371.20Unearned Interest: Leases108,628.