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ACFM 322 Chapter 15
| Term | Definition |
|---|---|
| Lease | Contractual arrangement where a lessor provides a lessee the right to use an asset for a specified period of time in exchange for period cash payments during the term of it |
| Lessor | Owner of the asset |
| Lessee | User of the asset |
| ROU Asset & Lease Payable | On the lessee's balance sheet, the right to use the asset is recorded as a __________________ & the obligation to make periodic cash payments over lease period is recorded as a _________________ |
| Reduces upfront cash needed, Lease payments are often lower than installment loan payments, Offers flexibility and lower costs on disposal of asset, Leasing might offer protection against the risk of declining values, Leasing might offer tax advantages | What are the 5 advantages of leasing? |
| Costs more than outright buying it | What is the biggest disadvantage of leasing? |
| Finance/Sales-Type & Operating | What are the 2 types of leases? |
| Financing & Sales-Type | A lease that resembles a sale of an asset is classified as a _________ lease for the lessee and a _____________ lease for the lessor |
| Specifies ownership transfers to lessee, Contains a purchase option lessee is reasonably certain to exercise, Term is for major part of asset's life, PV >= FV, Customized and has no alternative use to lessor at end of lease | Finance lease criteria (one must be met): |
| Operating | A lease that resembles a rental agreement is classified as an __________ lease |
| Installment | Accounting for a finance lease is similar to accounting for an ______________ purchase |
| Lease Term | Amortization period is restricted to the ____________ unless the lease provides for title transfer or BPO (for a finance/sales-type lease) |
| Debit ROU Asset & Credit Lease Payable Debit Lease Payable & Credit Cash | Journal Entry for the Lessee to record the start of the lease and the first payment (Finance/Sales-Type) |
| Debit Lease Receivable & Credit Asset Debit Cash & Credit Lease Receivable | Journal Entry for the Lessor to record the start of the lease and the first payment (Finance/Sales-Type) |
| Debit Interest Expense & Lease Payable & Credit Cash | Journal Entry for the Lessee to record the second payment with interest (Finance/Sales-Type) |
| Debit Cash & Credit Lease Receivable & Interest Revenue | Journal Entry for the Lessor to record the second payment with interest (Finance/Sales-Type) |
| Debit Amortization/Depreciation Expense & Credit ROU Asset | Journal Entry for the Lessee to record amortization/depreciation (Finance/Sales-Type) |
| No Entry for Amortization/Depreciation | Journal Entry for the Lessor to record amortization/depreciation (Finance/Sales-Type) |
| Debit Lease Receivable & Credit Sales Revenue Debit COGS & Credit Asset | Journal Entry for the Lessor if it manufactured the asset (Finance/Sales-Type) |
| Direct Financing Lease | If a lessee lacks control of an asset, they have an operating lease...but there is an exception: |
| Direct Financing Lease | When a third party is paid to guarantee all or part of the residual value |
| Interest + Amortization of the ROU Asset = Lease Payment | Accounting equation for an Operating Lease |
| Debit ROU Asset & Credit Lease Payable Debit Lease Payable & Credit Cash | Journal Entry for the Lessee to record the start of the lease and the first payment (Operating) |
| Debit Cash & Credit Deferred Revenue | Journal Entry for the Lessor to record the start of the lease and the first payment (Operating) |
| Debit Interest Expense & Lease Payable & Credit Cash | Journal Entry for the Lessee to record the second payment with interest (Operating) |
| Debit Deferred Revenue & Credit Lease Revenue Debit Cash & Credit Deferred Revenue | Journal Entry for the Lessor to record the second payment with interest (Operating) |
| Debit Amortization Expense & Credit ROU Asset | Journal Entry for the Lessee to record amortization/depreciation (Operating) |
| Debit Depreciation Expense & Credit Accumulated Depreciation | Journal Entry for the Lessor to record amortization/depreciation (Operating) |
| Residual Value of Leased Asset | Estimate of the asset's commercial value at the end of the lease term |
| Purchase Option | Lease contract provision that gives the lessee the option to purchase the leased asset during or at the end of the lease term at a specified exercise price |
| Bargain Purchase Option (BPO) | If the exercise of the option is reasonably certain |
| Must be an identified asset & Lessee must have the right to control the use of the asset | When does a contract meet the definition of a lease? |
| Non-Lease Component | If the charge represents a transfer of a good/service to the lessee apart from the leased asset it qualifies as a ______________________ and is separated from the lease payment |
| Expensed & Factored | Maintenance is generally ___________; taxes & insurance are ___________ into the lease payments |
| Initial Direct Costs | Costs that are associated directly with consummating a lease, essential to acquire the lease, & would not have been incurred had the lease agreement not occurred |
| Recorded as a selling expense in a sales-type lease that includes selling profit OR Deferred & expensed over lease term in a sales-type lease with no selling profit or in operating lease | If initial direct costs are incurred by lessor, they are: |
| Selling Profit | Fair Value > Cost/Carrying Value, recognized by lessor at beginning of term |
Created by:
MOWGaming04
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