Chapter21 fininanalcial accounting
Transcript of Chapter21 fininanalcial accounting
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PREVIEW OF CHAPTER
Intermediate Accounting
IFRS 2nd Edition
21
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5. Describe the lessor’s accounting for
direct-financing leases.
6. Identif s!ecial features of lease
arrangements that cause uni"ue
accounting !roblems.
#. Describe the effect of residual $alues%
guaranteed and unguaranteed% on lease
accounting.
&. Describe the lessor’s accounting for
sales-t!e leases.
'. (ist the disclosure re"uirements for
leases.
After studying this chapter, you should be able to:
Accounting for Leases
21LEARNING OBECTIVE!
LEARNING OBECTIVE!
1" E#$%ain t&e nature' econo(ic
su)stance' an* a*+antages of %ease
transactions"
2. Describe the accounting criteria and
!rocedures for ca!itali)ing leases b the
lessee.
*. +ontrast the o!erating and ca!itali)ation
methods of recording leases.
,. E!lain the ad$antages and economics
of leasing to lessors and identif the
classifications of leases for the lessor.
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Largest grou$ of %ease* e,ui$(ent in+o%+es-
Information technolog e"ui!ment
rans!ortation /truc0s% aircraft% rail1 +onstruction
Agriculture
A %ease is a contractual agreement beteen a lessor and a
lessee% that gi$es the %essee the right to use s!ecific !ro!ert%
oned b the %essor% for a s!ecified !eriod of time.
THE LEA!ING ENVIRON.ENT
LO 1
W&o Are t&e P%a/ers0
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3. 4rotection against obsolescence.
2. Fleibilit.
A*+antages of Leasing
LO 1
THE LEA!ING ENVIRON.ENT
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+a!itali)e a lease that transfers substantiall all of the
benefits and ris0s of !ro!ert onershi!% !ro$ided the
lease is noncance%a)%e.
Conce$tua% Nature of a Lease
(eases that do not transfer
substantiall all the benefits
and ris0s of
onershi! are o!erating leases.
LO 1
THE LEA!ING ENVIRON.ENT
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5. Describe the lessor’s accounting for
direct-financing leases.
6. Identif s!ecial features of lease
arrangements that cause uni"ue
accounting !roblems.
#. Describe the effect of residual $alues%guaranteed and unguaranteed% on lease
accounting.
&. Describe the lessor’s accounting for
sales-t!e leases.
'. (ist the disclosure re"uirements for
leases.
After studying this chapter, you should be able to:
LEARNING OBECTIVE!
LEARNING OBECTIVE!
3. E!lain the nature% economic substance%
and ad$antages of lease transactions.
2" escri)e t&e accounting criteria an*
$roce*ures for ca$ita%i3ing %eases )/t&e %essee"
*. +ontrast the o!erating and ca!itali)ationmethods of recording leases.
,. E!lain the ad$antages and economics
of leasing to lessors and identif the
classifications of leases for the lessor.
Accounting for Leases
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If the lessee ca$ita%i3es a lease% the lessee records an assetand a liabilit generall e"ual to the !resent $alue of the rental
!aments.
Records de!reciation on the leased asset.
reats the lease !aments as consisting of interest and
!rinci!al.
ACCO4NTING B5 THE LE!!EE
LO 2
ILL4!TRATION 212
ournal Entries for +a!itali)ed (ease
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For a finance %ease% the IAS has identified four criteria.
3. (ease transfers o6ners&i$ of the !ro!ert to the lessee.
2. (ease contains a 777777777777777777777777777777777.
*. (ease term is for (a7or $art of the economic life of the
asset.
One or (ore
must be met
for finance
%ease
accounting.
,. 7777777777777777777777 of the
minimum lease !amentsamounts to su)stantia%%/ a%% of
the fair $alue of the leased asset.
ACCO4NTING B5 THE LE!!EE
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Lease Agree(ent (eases that O NOT (eet an/ oft&e four criteria are accounted for
as
777777777777777777777777777.
LO 2
ACCO4NTING B5 THE LE!!EE
ILL4!TRATION 218
Diagram of (essee’s +riteria for (ease +lassification
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Ca$ita%i3ation Criteria
Transfer of O6ners&i$ Test
If the lease transfers onershi! of the asset to the lessee%
it is a finance lease.
BargainPurc&ase O$tion Test
At the ince!tion of the lease% the difference beteen the
o!tion !rice and the e!ected fair mar0et $alue must be
large enough to ma0e eercise of the o!tion reasonabl
assured.
LO 2
ACCO4NTING B5 THE LE!!EE
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Econo(ic Life Test
Lease ter( is generall considered to be the fied% non-
cancelable term of the lease.
Bargainrene6a% o$tion can etend this !eriod.
At the ince!tion of the lease% the difference beteen the
reneal rental and the e!ected fair rental must begreat enough to ma0e eercise of the o!tion to rene
reasonabl assured.
Ca$ita%i3ation Criteria
LO 2
ACCO4NTING B5 THE LE!!EE
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I%%ustration- Carrefour /FRA1 leases Leno+o /+891 4+sfor to ears at a rental of :3;; !er month !er com!uter
and subse"uentl can lease them for :3; !er month !er
com!uter for another to ears. he lease clearl offers a
bargain-reneal o!tion< the lease term is considered to be
four ears.
ACCO4NTING B5 THE LE!!EE
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Reco+er/ of In+est(ent Test
Minimum Lease Payments:
=inimum rental !aments >uaranteed residual $alue
4enalt for failure to rene or etend the lease
argain-!urchase o!tion
Executory osts: Insurance
=aintenance
aes
Eclude from 4? of
=inimum (ease
4ament +alculation
Ca$ita%i3ation Criteria
ACCO4NTING B5 THE LE!!EE
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Reco+er/ of In+est(ent Test
!iscount "ate
Ca$ita%i3ation Criteria
ACCO4NTING B5 THE LE!!EE
(essee com!utes the !resent $alue of the minimum lease
!aments using the i($%icit interest rate.
In the e$ent it is im!racticable to determine the im!licit
rate% the lessee should use its
7777incrementlal777777777777 )orro6ing rate.
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Asset an* Lia)i%it/ Recor*e* at the loer of@
3. !resent $alue of the minimum lease !aments
/ecluding eecutor costs1 or
2. fair mar0et $alue of the leased asset at the ince!tion
of the lease.
Asset an* Lia)i%it/ Accounte* for ifferent%/
ACCO4NTING B5 THE LE!!EE
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e$reciation Perio*
If lease transfers o6ners&i$% de!reciate asset o$er
the econo(ic %ife of the asset.
If lease *oes not transfer o6ners&i$% de!reciate
o$er the ter( of t&e %ease.
Asset an* Lia)i%it/ Accounte* for ifferent%/
ACCO4NTING B5 THE LE!!EE
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Effecti+eInterest .et&o*
sed to allocate each lease !ament beteen !rinci!al
and interest.
e$reciation Conce$t
De!reciation and the discharge of the obligation are
inde!endent accounting !rocesses.
Asset an* Lia)i%it/ Accounte* for ifferent%/
ACCO4NTING B5 THE LE!!EE
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I%%ustration- +98 +a!ital /9(D1 /a subsidiar of +98 >lobal1 and I$anhoe =ines
(td. /+A91 sign a lease agreement dated anuar 3% 2;35% that calls for +98 to
lease a front-end loader to I$anhoe beginning anuar 3% 2;35. he terms and
!ro$isions of the lease agreement and other !ertinent data are as follos.
• he term of the lease is fi$e ears. he lease agreement is non-cancelable%re"uiring e"ual rental !aments of B25%'&3.62 at the beginning of each ear
/annuit-due basis1.• he loader has a fair $alue at the ince!tion of the lease of B3;;%;;;% an
estimated economic life of fi$e ears% and no residual $alue.
• I$anhoe !as all of the eecutor costs directl to third !arties ece!t for the!ro!ert taes of B2%;;; !er ear% hich is included as !art of its annual
!aments to +98.
• he lease contains no reneal o!tions. he loader re$erts to +98 at thetermination of the lease.
• I$anhoe’s incremental borroing rate is 33 !ercent !er ear.
• I$anhoe de!reciates similar e"ui!ment that it ons on a straight-line basis.
• +98 sets the annual rental to earn a rate of return on its in$estment of 3;!ercent !er ear< I$anhoe 0nos this fact.
ACCO4NTING B5 THE LE!!EE
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Chat t!e of lease is this E!lain.
Ca$ita%i3ation Criteria-
3. ransfer of onershi!
2. argain !urchase o!tion
*. (ease term for maor !art
of economic life of
leased !ro!ert
,. 4resent $alue ofminimum lease !aments
substantiall all of F=? of
!ro!ert
NO
NO
Finance Lease' 9:
ACCO4NTING B5 THE LE!!EE
(ease term 5 rs.
Economic life 5 rs.
4? B3;;%;;;
F=? B3;;%;;;.5E!
5E!
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4ament B 25%'&3.62
4ro!ert taes /eecutor cost1 - 2%;;;.;;
=inimum lease !ament 2*%'&3.62
4resent $alue factor /i3;G%n51 ,.36'&6
4? of minimum lease !aments ;1
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(eased E"ui!ment 3;;%;;;.;;
(ease (iabilit 3;;%;;;.;;
I$anhoe records the finance lease on its boo0s on anuar 3% 2;35%as@
4ro!ert a E!ense 2%;;;.;;(ease (iabilit 2*%'&3.62
+ash 25%'&3.62
I$anhoe records the first %ease $a/(ent on anuar/ 1' 2% as
follos.
ACCO4NTING B5 THE LE!!EE
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ILLUSTRATION 21-6
Lease AmortizationSchedule for Lessee—
Annuity-Due Basis
ACCO4NTING B5 THE LE!!EE
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I$anhoe records accrued interest on December *3% 2;3,Interest E!ense #%6;3.&,
Interest 4aable #%6;3.&,
4re!are the entr to record accrued interest at December *3% 2;35.
LO 2
ACCO4NTING B5 THE LE!!EE ILL4!TRATION 21?(ease Amorti)ation
Schedule for (esseeH
Annuit-Due asis
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De!reciation E!ense 2;%;;;
Accumulated De!reciationH(eased E"ui!ment 2;%;;;
4re!are the re"uired on December *3% 2;35% to record de!reciationfor the ear using the straight-line method /B3;;%;;; 5 ears1.
he liabilities section as it relates to lease transactions at
December *3% 2;35.
ACCO4NTING B5 THE LE!!EE
ILL4!TRATION 21@
Re!orting +urrent and9on-+urrent (ease
(iabilities
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ILL4!TRATION 21?(ease Amorti)ation
Schedule for (esseeH
Annuit-Due asis
4ro!ert a E!ense 2%;;;.;;
Interest 4aable #%6;3.&,
(ease (iabilit 36%*#'.#&
+ash 25%'&3.62
I$anhoerecords the
lease
!ament of
anuar 3%
2;36% as
follos.
ACCO4NTING B5 THE LE!!EE
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O$erating .et&o* Lesseehe lessee assigns rent to the !eriods benefiting from the use
of the asset and ignores% in the accounting% an commitments to
ma0e future !aments.
I%%ustration- Assume I$anhoe accounts for the lease as an
o!erating lease. I$anhoe records the !ament on anuar 3%
2;35% as follos.
LO 2
Rent E!ense 25%'&3.62
+ash 25%'&3.62
ACCO4NTING B5 THE LE!!EE
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5. Describe the lessor’s accounting for
direct-financing leases.
6. Identif s!ecial features of lease
arrangements that cause uni"ue
accounting !roblems.
#. Describe the effect of residual $alues%guaranteed and unguaranteed% on lease
accounting.
&. Describe the lessor’s accounting for
sales-t!e leases.
'. (ist the disclosure re"uirements for
leases.
After studying this chapter, you should be able to:
LEARNING OBECTIVE!LEARNING OBECTIVE!
3. E!lain the nature% economic substance%
and ad$antages of lease transactions.
2. Describe the accounting criteria and
!rocedures for ca!itali)ing leases b the
lessee.
:" Contrast t&e o$erating an*ca$ita%i3ation (et&o*s of recor*ing
%eases"
,. E!lain the ad$antages and economics
of leasing to lessors and identif the
classifications of leases for the lessor.
Accounting for Leases
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ILL4!TRATION 21
+om!arison of +harges
to J!erationsH+a!ital
$s. J!erating (eases
Differences using a finance lease instead of an o!erating lease.
3. Increase in amount of re!orted debt /both short-term and long-term1.
2. Increase in amount of total assets /s!ecificall long-li$ed assets1.
*. (oer income earl in the life of the lease% therefore loer retained earnings.
ACCO4NTING B5 THE LE!!EE
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5. Describe the lessor’s accounting for
direct-financing leases.
6. Identif s!ecial features of lease
arrangements that cause uni"ue
accounting !roblems.
#. Describe the effect of residual $alues%guaranteed and unguaranteed% on lease
accounting.
&. Describe the lessor’s accounting for
sales-t!e leases.
'. (ist the disclosure re"uirements for
leases.
After studying this chapter, you should be able to:
LEARNING OBECTIVE!LEARNING OBECTIVE!
3. E!lain the nature% economic substance%
and ad$antages of lease transactions.
2. Describe the accounting criteria and
!rocedures for ca!itali)ing leases b the
lessee.
*. +ontrast the o!erating and ca!itali)ationmethods of recording leases.
8" E#$%ain t&e a*+antages an*
econo(ics of %easing to %essors an*
i*entif/ t&e c%assifications of %eases
for t&e %essor"
Accounting for Leases
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A lessor determines the amount of the rental% basing it on the rate
of returnHthe im!licit rateHneeded to ustif leasing the asset.
If a residual $alue is in$ol$ed /hether guaranteed or not1% thecom!an ould not ha$e to reco$er as much from the lease
!aments.
Econo(ics of Leasing
ACCO4NTING B5 THE LE!!OR
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a. J!erating leases.
b. Finance leases
Direct-financing leases
Sales-t!e leases
C%assification of Leases )/ t&e Lessor
ACCO4NTING B5 THE LE!!OR
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C%assification of Leases )/ t&e Lessor
ACCO4NTING B5 THE LE!!OR
ILL4!TRATION 211<
Diagram of (essor’s+riteria for (ease
+lassification
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>" escri)e t&e %essorDs accounting for
*irectfinancing %eases"
6. Identif s!ecial features of lease
arrangements that cause uni"ue
accounting !roblems.
#. Describe the effect of residual $alues%guaranteed and unguaranteed% on lease
accounting.
&. Describe the lessor’s accounting for
sales-t!e leases.
'. (ist the disclosure re"uirements for
leases.
After studying this chapter, you should be able to:
LEARNING OBECTIVE!LEARNING OBECTIVE!
3. E!lain the nature% economic substance%
and ad$antages of lease transactions.
2. Describe the accounting criteria and
!rocedures for ca!itali)ing leases b the
lessee.
*. +ontrast the o!erating and ca!itali)ationmethods of recording leases.
,. E!lain the ad$antages and economics
of leasing to lessors and identif the
classifications of leases for the lessor.
Accounting for Leases
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In su)stance the financing of an asset !urchase b the lessee.
Lessor recor*s-
A 77777777777777777777777 instead of a leased asset.
Recei$able is the !resent $alue of the minimum lease
!aments !lus the !resent $alue of the unguaranteed
residual $alue.
irectFinancing .et&o* Lessor
ACCO4NTING B5 THE LE!!OR
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I%%ustration- sing the data from the !receding +98KI$anhoe eam!le
e illustrate the accounting treatment for a direct-financing lease. Ce
re!eat here the information rele$ant to +98 in accounting for this
lease transaction.
3. he term of the lease is fi$e ears beginning anuar 3% 2;35%
non-cancelable% and re"uires e"ual rental !aments of B25%'&3.62
at the beginning of each ear. 4aments include B2%;;; of
eecutor costs /!ro!ert taes1.
2. he e"ui!ment /front-end loader1 has a cost of B3;;%;;; to +98%
a fair $alue at the ince!tion of the lease of B3;;%;;;% an estimated
economic life of fi$e ears% and no residual $alue.
*. +98 incurred no initial direct costs in negotiating and closing the
lease transaction.
ACCO4NTING B5 THE LE!!OR
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he lease meets the criteria for classification as a *irectfinancing %ease for t6o reasons@
3. the lease term e"uals the e"ui!ment’s estimated economic
life% and
2. the !resent $alue of the minimum lease !aments e"uals the
e"ui!mentLs fair $alue.
It is not a sa%est/$e %ease because there is no difference
beteen the fair $alue /B3;;%;;;1 of the loader and +98’s cost
/B3;;%;;;1.
ACCO4NTING B5 THE LE!!OR
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ACCO4NTING B5 THE LE!!OR
+98 records the lease of the asset and the resulting recei$ableon anuar 3% 2;35 /the ince!tion of the lease1% as follos.
(ease Recei$able 3;;%;;;
E"ui!ment 3;;%;;;
ILL4!TRATION 2112
+om!utation of (ease
Recei$able
+om!anies often re!ort the lease recei$able in the statement of
financial !osition as M9et in$estment in finance leases.
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ILLUSTRATION 21-13
Lease AmortizationSchedule for Lessor—
Annuity-Due Basis
ACCO4NTING B5 THE LE!!OR
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I$anhoe records accrued interest on December *3% 2;3,Interest Recei$able #%6;3.&,
Interest Re$enue #%6;3.&,
Jn December *3% 2;35% +98 recogni)es the interest re$enue earned
during the first ear through the folloing entr.
ILLUSTRATION 21-13
Lease AmortizationSchedule for Lessor—
Annuity-Due Basis
ACCO4NTING B5 THE LE!!OR
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At December *3% 2;35% +98 re!orts the lease recei$able in itsstatement of financial !osition among current assets or non-current
assets% or both. It classifies the !ortion due ithin one ear or the
o!erating ccle% hiche$er is longer% as a current asset% and the rest
ith non-current assets.
ILL4!TRATION 2118Re!orting (ease
ransactions b (essor
ACCO4NTING B5 THE LE!!OR
LO %
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I$anhoe records accrued interest on December *3% 2;3,+ash 25%'&3.62
(ease Recei$able 36%*#'.#&
Interest Recei$able #%6;3.&,
4ro!ert a E!enseK4ro!ert aes 4aable 2%;;;.;;
he folloing entr records the recei!t of the second earLs lease
!ament on anuar 3% 2;36.
ILLUSTRATION 21-13
Lease AmortizationSchedule for Lessor—
Annuity-Due Basis
ACCO4NTING B5 THE LE!!OR
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I$anhoe records accrued interest on December *3% 2;3,Interest Recei$able 5%'6*.&6
Interest Re$enue 5%'6*.&6
he folloing entr records the recognition of interest earned on
December *3% 2;36.
ILLUSTRATION 21-13
Lease AmortizationSchedule for Lessor—
Annuity-Due Basis
ACCO4NTING B5 THE LE!!OR
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5. Describe the lessor’s accounting for
direct-financing leases.
?" I*entif/ s$ecia% features of %ease
arrange(ents t&at cause uni,ueaccounting $ro)%e(s"
#. Describe the effect of residual $alues%guaranteed and unguaranteed% on lease
accounting.
&. Describe the lessor’s accounting for
sales-t!e leases.
'. (ist the disclosure re"uirements for
leases.
After studying this chapter, you should be able to:
LEARNING OBECTIVE!LEARNING OBECTIVE!
3. E!lain the nature% economic substance%
and ad$antages of lease transactions.
2. Describe the accounting criteria and
!rocedures for ca!itali)ing leases b the
lessee.
*. +ontrast the o!erating and ca!itali)ationmethods of recording leases.
,. E!lain the ad$antages and economics
of leasing to lessors and identif the
classifications of leases for the lessor.
Accounting for Leases
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3. Residual $alues.
2. Sales-t!e leases /lessor1.
*. argain-!urchase o!tions.
,. Initial direct costs.
5. +urrent $ersus non-current classification.
6. Disclosure.
!PECIAL ACCO4NTING PROBLE.!
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5. Describe the lessor’s accounting for
direct-financing leases.
6. Identif s!ecial features of lease
arrangements that cause uni"ue
accounting !roblems.
@" escri)e t&e effect of resi*ua% +a%ues'guarantee* an* unguarantee*' on
%ease accounting"
&. Describe the lessor’s accounting for
sales-t!e leases.
'. (ist the disclosure re"uirements for
leases.
After studying this chapter, you should be able to:
LEARNING OBECTIVE!LEARNING OBECTIVE!
3. E!lain the nature% economic substance%
and ad$antages of lease transactions.
2. Describe the accounting criteria and
!rocedures for ca!itali)ing leases b the
lessee.
*. +ontrast the o!erating and ca!itali)ationmethods of recording leases.
,. E!lain the ad$antages and economics
of leasing to lessors and identif the
classifications of leases for the lessor.
Accounting for Leases
21
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.eaning of Resi*ua% Va%ue Estimated fair $alue of the
leased asset at the end of the lease term.
Guarantee* +ersus 4nguarantee* A guaranteed residual$alue is hen the lessee agrees to ma0e u! an deficienc
belo a stated amount that the lessor reali)es in residual $alue
at the end of the lease term.
Resi*ua% Va%ues
!PECIAL ACCO4NTING PROBLE.!
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Lease Pa/(ents (essor ma adust lease !aments
because of the increased certaint of reco$er of a guaranteed
residual $alue.
Lessee Accounting for Resi*ua% Va%ue he (ini(u(
%ease $a/(ent includes a guaranteed residual $alue but
ecludes an unguaranteed residual $alue.
Resi*ua% Va%ues
!PECIAL ACCO4NTING PROBLE.!
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I%%ustration- Assume the same data as in the +98KI$anhoe illustrations ece!t
that +98 esti(ates a resi*ua% +a%ue of ;>'
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+98 assumes a 3; !ercent return on in$estment /RJI1% hetherthe residual $alue is guaranteed or unguaranteed. +98 ould
com!ute the amount of the lease !aments as follos.
Lease Pa/(ents
ILLUSTRATION 21-15
Lessor’s Computation of Lease Payments
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(uaranteed "esidual )alue *Lessee Accounting+An additional lease !ament that the lessee ill !a in !ro!ert or
cash% or both% at the end of the lease term.
Lease Accounting for Resi*ua% Va%ue
ILLUSTRATION 21-16
Computation of Lessee’s Capitalized Amount—Guaranteed esidual !alue
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Guarantee* Resi*ua% Va%ue Lessee
ILL4!TRATION 211@
(ease Amorti)ation Schedule for
(esseeH>uaranteed Residual ?alue
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At the end of the lease term% before the lessee transfers the assetto +98% the lease asset and liabilit accounts ha$e the folloing
balances.
Assume that I$anhoe de!reciated the leased asset don to its
residual $alue of B5%;;; but that the fair mar0et $alue of the
residual $alue at December *3% 2;3'% as B*%;;;. I$anhoe ould
ma0e the folloing ournal entr.
Guarantee* Resi*ua% Va%ue Lessee
ILLUSTRATION 21-18
Account Balances on Lessee’s Boo"s at #ndof Lease $erm—Guaranteed esidual !alue
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(oss on Dis!osal of E"ui!ment 2%;;;.;;
Interest E!ense /or Interest 4aable1 ,5,.#6
(ease (iabilit ,%5,5.2,
Accumulated De!reciationH(eased E"ui!ment '5%;;;.;;
(eased E"ui!ment 3;;%;;;.;;
+ash 2%;;;.;;
ILL4!TRATION 211
Guarantee* Resi*ua% Va%ue Lessee
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Assume the same facts as those abo$e ece!t that the B5%;;;
residual $alue is unguarantee* instead of guaranteed. +98 ill
reco$er the same amount through lease rentalsHthat is%
B'6%&'5.,;. I$anhoe ould ca!itali)e the amount as follos@
nguaranteed "esidual )alue *Lessee Accounting+
Lease Accounting for Resi*ua% Va%ue
ILLUSTRATION 21-19
Computation of Lessee’s Capitalized
Amount—%n&uaranteed esidual !alue LO '
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Unguaranteed Residua !aue "Lessee#
ILL4!TRATION 212<
(ease Amorti)ation Schedule for (essee
Hnguaranteed Residual ?alue
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At the end of the lease term% before I$anhoe transfers the asset to+98% the lease asset and liabilit accounts ha$e the folloing
balances.
4nguarantee* Resi*ua% Va%ue Lessee
ILL4!TRATION 2121
Account alances on (essee’s oo0sat End of (ease ermH
nguaranteed Residual ?alue
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Lessee Entries In+o%+ing Resi*ua% Va%ues
ILL4!TRATION 2122
+om!arati$e Entries for >uaranteed and nguaranteed Residual ?alues% (essee +om!an LO '
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I%%ustration- Assume a direct-financing lease ith a residual $alue
/either guaranteed or unguaranteed1 of B5%;;;. +98 determines the
!aments as follos.
Lessor Accounting for Resi*ua% Va%uehe lessor or0s on the assum!tion that it ill reali)e t&e resi*ua%
+a%ue at t&e en* of t&e %ease ter( 6&et&er guarantee* or
unguarantee*.
ILL4!TRATION 212:
!PECIAL ACCO4NTING PROBLE.!
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Lessor Accounting for Resi*ua% Va%ue
ILL4!TRATION 2128
(ease Amorti)ation Schedule% for (essorH
>uaranteed or nguaranteed Residual ?alue
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Lessor Accounting for Resi*ua% Va%ue
I%%ustration 2128
+98 ould
ma0e the
folloing
entr for this
direct-
financing
lease on
3K3K35.
(ease Recei$able 3;;%;;;.;;
E"ui!ment 3;;%;;;.;;
i f i* % %
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Lessor Accounting for Resi*ua% Va%ue
I%%ustration 2128
+98 ould
ma0e the
folloing
entr for this
direct-
financing
lease on
3K3K35.
+ash 25%2*#.;'
(ease Recei$able 2*%2*#.;'
4ro!ert a E!enseK4ro!ert aes 4aable 2%;;;.;;
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5. Describe the lessor’s accounting for
direct-financing leases.
6. Identif s!ecial features of lease
arrangements that cause uni"ue
accounting !roblems.
#. Describe the effect of residual $alues%guaranteed and unguaranteed% on lease
accounting.
" escri)e t&e %essorDs accounting for
sa%est/$e %eases"
'. (ist the disclosure re"uirements for
leases.
After studying this chapter, you should be able to:
LEARNING OBECTIVE!LEARNING OBECTIVE!
3. E!lain the nature% economic substance%
and ad$antages of lease transactions.
2. Describe the accounting criteria and
!rocedures for ca!itali)ing leases b the
lessee.
*. +ontrast the o!erating and ca!itali)ationmethods of recording leases.
,. E!lain the ad$antages and economics
of leasing to lessors and identif the
classifications of leases for the lessor.
Accounting for Leases
21
!PECIAL ACCO4NTING PROBLE.!
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4rimar difference beteen a direct-financing lease and
a sa%est/$e %ease is the manufacturer’s or dealer’s
gross !rofit /or loss1.
(essor records the sale !rice of the asset% the cost of
goods sold and related in$entor reduction% and the
lease recei$able.
here is a difference in accounting for guaranteed andunguaranteed residual $alues.
!a%esT/$e Leases Lessor
!PECIAL ACCO4NTING PROBLE.!
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ILL4!TRATION 212?
!a%esT/$e Leases Lessor
irectFinancing +ersus !a%esT/$e Leases
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LEA!E RECEIVABLE /also referred to as NET INVE!T.ENT1. he
!resent $alue of the minimum lease !aments !lus the !resent $alue of
an unguaranteed residual $alue. he lease recei$able therefore includesthe !resent $alue of the residual $alue% hether guaranteed or not.
!ALE! PRICE OF THE A!!ET" he !resent $alue of the minimum lease
!aments.
CO!T OF GOO! !OL" he cost of the asset to the lessor% less the
!resent $alue of an unguaranteed residual $alue.
LO -
!a%esT/$e Leases Lessor
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I%%ustration- o illustrate a sales-t!e lease ith a guaranteed
/left hand side1 residual $alue and ith an unguaranteed /right
hand side1 residual $alue% assume the same facts as in the
!receding direct-financing lease situation. he estimated residual
$alue is B5%;;; /the !resent $alue of hich is B*%3;,.6;1% and theleased e"ui!ment has an B&5%;;; cost to the dealer% +98.
Assume that the fair mar0et $alue of the residual $alue is B*%;;;
at the end of the lease term.
!a%esT/$e Leases Lessor
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Co($utation of Lease A(ounts )/ CNH
Financia%!a%esT/$e LeaseILL4!TRATION 212@
!a%esT/$e Leases Lessor
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Co($arati+e
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Entries
I%%ustration 212
!a%esT/$e Leases Lessor
!PECIAL ACCO4NTING PROBLE.!
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(essee must increase the !resent $alue of the minimum
lease !aments b the $resent +a%ue of t&e o$tion.
Jnl difference beteen the accounting treatment for a
bargain-!urchase o!tion and a guaranteed residual $alue
of identical amounts is in the co($utation of t&e
annua% *e$reciation.
Bargain Purc&ase O$tion Lessee
!PECIAL ACCO4NTING PROBLE.!
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Accounting for initia% *irect costs-
O$erating %eases% the lessor should defer initial direct
costs. !a%est/$e %eases% the lessor e!enses the initial direct
costs.
irectfinancing %ease% the lessor adds initial direct
costs to the net in$estment.
Initia% irect Costs Lessor
!PECIAL ACCO4NTING PROBLE.!
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oth the annuit-due and the ordinar-annuit situations re!ort
the reduction of !rinci!al for the net !eriod as a current
liabilitKcurrent asset.
Current +s Noncurrent
!PECIAL ACCO4NTING PROBLE.!
LO -
Current +ersus Noncurrent ILL4!TRATION 21 2
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he current !ortion of the lease liabilit K recei$able as of December
*3% 2;35% ould be
Current +ersus Noncurrent
B3&%;3#.#;.
ILL4!TRATION 212
(ease Amorti)ation
ScheduleHJrdinar-
Annuit asis
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5. Describe the lessor’s accounting for
direct-financing leases.
6. Identif s!ecial features of lease
arrangements that cause uni"ue
accounting !roblems.
#. Describe the effect of residual $alues%guaranteed and unguaranteed% on lease
accounting.
&. Describe the lessor’s accounting for
sales-t!e leases.
" List t&e *isc%osure re,uire(ents for
%eases"
After studying this chapter, you should be able to:
LEARNING OBECTIVE!LEARNING OBECTIVE!
3. E!lain the nature% economic substance%
and ad$antages of lease transactions.
2. Describe the accounting criteria and
!rocedures for ca!itali)ing leases b the
lessee.
*. +ontrast the o!erating and ca!itali)ationmethods of recording leases.
,. E!lain the ad$antages and economics
of leasing to lessors and identif the
classifications of leases for the lessor.
Accounting for Leases
21
!PECIAL ACCO4NTING PROBLE.!
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For %essees-
A general descri!tion of material leasing arrangements.
A reconciliation beteen the total of future minimum lease!aments at the end of the re!orting !eriod and their !resent
$alue.
he total of future minimum lease !aments at the end of the
re!orting !eriod% and their !resent $alue for !eriods /31 not laterthan one ear% /21 later than one ear and not later than fi$e
ears% and /*1 later than fi$e ears.
isc%osing Lease ata
!PECIAL ACCO4NTING PROBLE.!
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For %essors-
A general descri!tion of material leasing arrangements.
A reconciliation beteen the gross in$estment in the lease at theend of the re!orting !eriod% and the !resent $alue of minimum
lease !aments recei$able at the end of the re!orting !eriod.
nearned finance income.
he gross in$estment in the lease and the !resent $alue of
minimum lease !aments recei$able at the end of the re!orting
!eriod for !eriods /31 not later than one ear% /21 later than one
ear and not later than fi$e ears% and /*1 later than fi$e ears.
isc%osing Lease ata
!PECIAL ACCO4NTING PROBLE.!
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o a$oid leased asset ca!itali)ation% com!anies design% rite%
and inter!ret lease agreements to !re$ent satisfing an of the
four finance lease criteria.
he real challenge lies in dis"ualifing the lease as a finance
lease to the lessee% hile ha$ing the same lease "ualif as afinance /sales or financing1 lease to the lessor.
nli0e lessees% lessors tr to a$oid ha$ing lease arrangements
classified as o!erating leases.
4nreso%+e* Lease Accounting Pro)%e(s
LO .
GLOBAL ACCO4NTING IN!IGHT!
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LEA!E ACCO4NTING(easing is a global business. (essors and lessees enter into arrangements
ith one another ithout regard to national boundaries. Although .S. >AA4
and IFRS for leasing are similar% both the FAS and the IAS ha$e decided
that the eisting accounting does not !ro$ide the most useful% trans!arent% and
com!lete information about leasing transactions that should be !ro$ided in the
financial statements.
GLOBAL ACCO4NTING IN!IGHT!
After 82 = readings
GLOBAL ACCO4NTING IN!IGHT!
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Re%e+ant FactsFolloing are the 0e similarities and differences beteen .S. >AA4 and
IFRS related to accounting for leases.
!i(i%arities
• oth .S. >AA4 and IFRS share the same obecti$e of recording leases blessees and lessors according to their economic substance% that is%
according to the definitions of assets and liabilities.
• =uch of the terminolog for lease accounting in .S. >AA4 and IFRS is the
same.
• nder .S. >AA4 and IFRS% lessees and lessors use the same general
lease ca!itali)ation criteria to determine if the ris0s and reards of
onershi! ha$e been transferred in the lease.
GLOBAL ACCO4NTING IN!IGHT!
GLOBAL ACCO4NTING IN!IGHT!
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Re%e+ant Factsifferences
• Jne difference in lease terminolog is that finance leases are referred to as
ca!ital leases in .S. >AA4.
• .S. >AA4 for leases uses bright-line criteria to determine if a leasearrangement transfers the ris0s and reards of onershi!< IFRS is more
general in its !ro$isions.
• .S. >AA4 has additional lessor criteria@ !aments are collectible% and
there are no additional costs associated ith a lease.
• .S. >AA4 re"uires use of the incremental rate unless the im!licit rate is
0non b the lessee and the im!licit rate is loer than the incremental rate.
IFRS re"uires that lessees use the im!licit rate to record a lease unless it is
im!ractical to determine the lessor’s im!licit rate.
GLOBAL ACCO4NTING IN!IGHT!
GLOBAL ACCO4NTING IN!IGHT!
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Re%e+ant Factsifferences
• nder .S. >AA4% etensi$e disclosure of future non-cancelable lease
!aments is re"uired for each of the net fi$e ears and the ears
thereafter. IFRS does not re"uire it although some com!anies !ro$ide aear-b-ear brea0out of !aments due in ears 3 through 5.
• he FAS standard for leases /SFAS 9o. 3*1 has been the subect of more
than *; inter!retations since its issuance. he IFRS leasing standard is IAS
3#% first issued in 3'&2. his standard is the subect of onl three
inter!retations. Jne reason for this small number of inter!retations is that
IFRS does not s!ecificall address a number of leasing transactions that
are co$ered b .S. >AA4. Eam!les include lease agreements for natural
resources% sale-leasebac0s% real estate leases% and le$eraged leases.
GLOBAL ACCO4NTING IN!IGHT!
GLOBAL ACCO4NTING IN!IGHT!
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On t&e Hori3on(ease accounting is one of the areas identified in the IASKFAS
=emorandum of nderstanding. he oards ha$e issued !ro!osed rules
based on Mright of use%N hich re"uires that all leases% regardless of their
terms% be accounted for in a manner similar to ho finance leases are treated
toda. hat is% the notion of an o!erating lease ill be eliminated% hich ill
address the concerns under current rules in hich no asset or liabilit is
recorded for man o!erating leases. A final standard is e!ected in 2;35. Oou
can follo the lease !roect at the IAS ebsite /[email protected].
GLOBAL ACCO4NTING IN!IGHT!
APPENI 21A EA.PLE! OF LEA!E ARRANGE.ENT!
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LO 1/ nderstand
and apply leaseaccounting
concepts to
0arious lease
arrangements
ILL4!TRATION 21A1
Illustrati$e (easeSituations% (essors
APPENI 21A EA.PLE! OF LEA!E ARRANGE.ENT!
APPENI 21A EA.PLE! OF LEA!E ARRANGE.ENT!
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APPENI 21A EA.PLE! OF LEA!E ARRANGE.ENT!
ILL4!TRATION 21A2
+om!arati$e Entries for
J!erating (ease
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APPENI 21A EA.PLE! OF LEA!E ARRANGE.ENT!
ILL4!TRATION 21A:
+om!arati$e Entries for
Finance (easeHargain-
4urchase J!tion
LO 1/
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APPENI 21A EA.PLE! OF LEA!E ARRANGE.ENT!
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APPENI 21A EA.PLE! OF LEA!E ARRANGE.ENT!
ILL4!TRATION 21A8+om!arati$e Entries for
Finance (ease
LO 1/
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APPENI 21A EA.PLE! OF LEA!E ARRANGE.ENT!
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APPENI 21A EA.PLE! OF LEA!E ARRANGE.ENT!
ILL4!TRATION 21A>
+om!arati$e Entries for
J!erating (ease
LO 1/
APPENI 21B !ALELEA!EBACJ!
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21-95 LO 11 !escribe the lessees accounting for sale3leasebac4 transactions
he term sa%e%ease)ac describes a transaction in hich
the oner of the !ro!ert /seller-lessee1 sells the !ro!ert to
another and simultaneousl leases it bac0 from the ne
oner.
A*+antages-
3. Financing
2. aes
APPENI 21B !ALELEA!EBACJ!
APPENI 21B !ALELEA!EBACJ!
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ETER.INING A!!ET 4!Eo the etent the se%%er%essee continues to use the asset
after the sale% the sale-leasebac0 is reall a form of financing.
(essor s&ou%* not recogni3e a gain or %oss on the
transaction.
If the se%%er%essee gi+es u$ t&e rig&t to t&e use of the asset%
the transaction is in substance a sale.
Gain or %oss recognition is a!!ro!riate.
LO 11
APPENI 21B !ALELEA!EBACJ!
APPENI 21B !ALELEA!EBACJ!
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If the lease meets one of the four criteria for treatment as a
finance lease% the seller-lessee should
Account for the transaction as a sale and the lease as a
finance lease.
Defer an !rofit or loss it e!eriences from the sale of the
assets that are leased bac0 under a finance lease.
Amorti)e !rofit o$er the lease term .
Lessee
APPENI 21B !ALE LEA!EBACJ!
LO 11
APPENI 21B !ALELEA!EBACJ!
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If none of the finance lease criteria are satisfied% t&e se%%er
%essee accounts for t&e transaction as a sa%e an* t&e %ease
as an o$erating %ease.
(essee defers such !rofit or loss and amorti)es it in
!ro!ortion to the rental !aments o$er the !eriod hen it
e!ects to use the assets.
Lessee
APPENI 21B !ALE LEA!EBACJ!
LO 11
APPENI 21B !ALELEA!EBACJ!
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If the lease meets one of the lease ca!itali)ation criteria% the
!urchaser-lessor records the transaction as a !urchase and a
direct-financing lease.
If the lease does not meet the criteria% the !urchaser-lessor
records the transaction as a !urchase and an o!erating lease.
Lessor
APPENI 21B !ALE LEA!EBACJ!
LO 11
APPENI 21B !ALELEA!EBACJ!
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$a%an Airines "$AL# on 'anuary () *+(,) sells a used Boein& , ha.in& a
carryin& amount on its /oo"s of 0,),++)+++ to &iti&a%ita for 01+)+++)+++2 'AL
immediately leases the aircraft /ac" under the follo3in& conditions4
(2 $he term of the lease is (, years) non-cancela/le) and re5uires e5ual rental
payments of 0(+)61)667 at the /e&innin& of each year2
*2 $he aircraft has a fair .alue of 01+)+++)+++ on 'anuary () *+(,) and an
estimated economic life of (, years2
72 'AL pays all e8ecutory costs2
62 'AL depreciates similar aircraft that it o3ns on a strai&ht-line /asis o.er (,
years2
,2 $he annual payments assure the lessor a (* percent return2
92 'AL’s incremental /orro3in& rate is (* percent2
!ALELEA!EBACJ EA.PLE
APPENI 21B !ALE LEA!EBACJ!
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APPENI 21B !ALELEA!EBACJ!
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his lease is a finance lease to A( because the lease term is
e"ual to the estimated life of the aircraft and because the
!resent $alue of the lease !aments is e"ual to the fair $alue of
the aircraft to +iti+a!ital.
+iti+a!ital should classif this lease as a direct financing lease.
APPENI 21B !ALE LEA!EBACJ!
!ALELEA!EBACJ EA.PLE
LO 11
APPENI 21B !ALELEA!EBACJ!
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8/17/2019 Chapter21 fininanalcial accounting
102/103
21-102
21B !ALE LEA!EBACJ!
LO 11
APPENI 21B !ALELEA!EBACJ!
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8/17/2019 Chapter21 fininanalcial accounting
103/103