Chapter 9 - Finance Lease-LESSEE

UNGUARANTEED RESIDUAL VALUE IS IGNORED!!! BOTH IN COMPUTING FOR LEASE LIABILITY AND DEPRECIABLE AMOUNT

Lease is a FINANCE lease if it has any of the following:1. Transfer of owenship2. A Bargain purchase option3. Lease Term/Life of Asset = 75% (at least)4. Present Value of Lease Payments/Fair Value of Leased Assets = 90% (at least)

Minimum Lease Payments- Rental Payments- Payments required under bagain purchase option- Guaranteed Residual Value (in the absence of bargain purchase option)

Recognition of Asset and Liability- the lower of the Fair Value of the Leased Property at inception date and Present Value of Minimum Lease Payments- plus, in the case of Bargain Purchase Option, Present Value of the Bargain Purchase Option- plus, in the case of Guaranteed Residual Value, Present Value of the Guaranteed Residual Value

- initial direct costs is part of the leased asset ONLY and SHOULD NOT FORM PART OF LEASE LIABILITY!- executory costs are expensed outright

Payment of Lease Liability (debit of lease liability)- annual payments - interest expense = lease liability to be debited

Ammortization- the difference between the face value of the rentals and its present value is the interest to be ammortized using effective interest method

Depreciation (conisder only Residual Value if it is GUARANTEED, otherwise ignore it)- use LIFE OF THE ASSET if the financial lease qualifies under any of these:- Transfer of ownership- Bargain Purchase Option

- use the shorter between LIFE OF THE ASSET and LEASE TERM if the financial lease qualifies under any of these:- 75% criteria- 90% criteria

Bargain Purchase Option (Initial Recognition of Liability & Asset = Present Value of rental payments and Bargain purchase option)if it is exercised:Lease Liabilityxx (equal to bargain purchase option price)Cashxx

if not, recognize a loss equal to Carrying Amount of Asset minus Lease Liability Balance:Accumulated Dep.xxLease LiabilityxxLoss on finance LeasexxAssetxx

Guaranteed Residual Value (Initial Recognition of Liability & Asset = Present Value of rental payments and Guaranteed Residual Value)

- the asset will revert back to the lessor at the end of lease term at the amount equal to the Guaranteed Residual Value- upon return, both the Carrying Amount of the asset and Lease Liability(add accrued interest payable if any) should always be equal to the Guaranteed Residual Value- NOTE: if the Fair Value at return date is lower than the guaranteed Residual Value, a loss should be recorded as follows:Loss on Finance Leasexx (difference between FV and Guaranteed Residual Value)Cashxx- no entry is needed if the FV is higher than the Guaranteed Residual Value

Actual Purchase of Leased AssetCost of Asset = Carrying Amount of Leased Asset + Cash Payment - Balance of Lease Liability