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CH. 22 ACCOUNTING FOR LEASES.

I. Leases.

1. Definition:

- a contracta! a"ree#ent $et%een a !essor an& !essee t'at con(e)s to t'e !essee t'e ri"'t to ses*ecific *ro*ert)+ o%ne& $) t'e !essor+ for a s*ecific *erio& of ti#e in retrn for sti*!ate& cas'*a)#ents ,rent.

2. A&(anta"e Of Leasin":

- 1/ financin" at fi0e& rate. - *rotection a"ainst o$so!escence. - f!e0i$i!it).

- !ess cost!) financin". - off-$a!ance s'eet financin".

. Genera! Gi&e!ine For Lease Accontin".

- FASBreco##en& t'at a !ease t'at transfers s$stantia!!) a!! of t'e $enefits an& riss ofo%ners'i* of *ro*ert) $e ca*ita!i3e&. T'erefore+

a. sc' !eases are capital leases. $. ot'er !eases ,t'at &o not transfer ... are operating leases.

II. Accontin" For Lessees.

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1. Ca*ita!i3ation Criteria.

- if at t'e &ate of t'e !ease a"ree#ent+ t'e !essee is *art) to a noncance!a$!e !ease t'at #eets one or#ore of t'e fo!!o%in" criteria+ t'e !essee s'a!! c!assif) an& accont for t'e a"ree#ent as a ca*ita!!ease.

1 t'e !ease transfers o%ners'i* of t'e *ro*ert) to t'e !essee. 2 t'e !ease contains a $ar"ain *rc'ase o*tion.

t'e !ease ter# is e4a! to 56/ or #ore of t'e esti#ate& econo#ic !ife of t'e !ease& *ro*ert).7 t'e *resent (a!e of t'e #ini## !ease *a)#ents ,e0c!&in" e0ector) costs e4a!s or e0cee&s

8/ of t'e fair (a!e of t'e !ease& *ro*ert).

a. #ini## !ease *a)#ents inc!&e t'e fo!!o%in"+- #ini## renta! *a)#ents+- "arantee& resi&a! (a!e or $ar"ain *rc'ase o*tion+- *ena!t) for fai!re to rene% or e0ten& t'e !ease.

$. e0ector) costs: in or&er to se t'e !ease& *ro*ert)+ !ie ot'er assets+ or&inar) costs sc' asinsrance cost+ #aintenance cost+ *ro*ert) ta0 etc. are incrrin".

- t'e lessees'o!& $e res*onsi$!e for t'e e0ector) costs+ if a !ease is not an o*eratin" !ease. - t'e e0ector) costs s'o!& $e e0c!&e& in co#*tin" t'e #ini## !ease *a)#ent.

c. &iscont rate: to co#*te t'e *resent (a!e of t'e #ini## !ease *a)#ent.

- se t'e lessee's incremental borrowing rate.- however, if (1) the lessee knows the i#*!icit rate co#*te& $) t'e !essorand () the

implicit rate is less than the lessee's incremental borrowing rate, t'en t'e !essee #st !se

the lessor's implicit rate.

2. O*eratin" Lease.

- rent e0*enses are reco"ni3e& as t'e *ro*ert) is se&.- t's+ a**ro*riate accra!s or &eferra!s are #a&e if t'e accontin" *erio& en&s $et%een rent

*a)#ent &ates.

e.". at *a)#ent+

$) t'e !essee+rent e0*ense 000

cas' 000$) t'e !essor+

cas' 000renta! re(ene 000

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at t'e en& of accontin" *erio& if it is &ifferent fro# t'e *a)#ent &ate+

$) t'e !essee+

rent e0*ense 000rent *a)a$!e 000

$) t'e !essor+

rent recei(a$!e 000renta! re(ene 000

. Ca*ita! Lease.

1 9a!ation Of Lease& Asset An& Lia$i!it).

- t'e !essee recor& a ca*ita! !ease as an asset an& a !ia$i!it) at t'e !o%er of

,1 t'e *resent (a!e of t'e #ini## !ease *a)#ents or,2 t'e fair #aret (a!e of t'e !ease& *ro*ert) at t'e ince*tion of t'e !ease.

e.".

at contract+

!ease& e4i*#ent n&er ca*ita! !eases 000 o$!i"ations n&er ca*ita! !eases 000

2 De*reciation Of Lease& Asset.,Usin" T'e Strai"'t-Line et'o&

a. if t'e !ease satisfies eit'er criterion 1 or criterion 2+ t'e depreciation periodis the economiclife of the asset.

- a!%a)s s$tract t'e resi&a! (a!e to "et t'e &e*reciation $ase.

$. if t'e !ease satisfies eit'er criterion or criterion 7+ t'e depreciation periodis the term of thelease.

- s$tract t'e resi&a! (a!e on!) if t'e !essee "arantees it.

c. t'e &e*reciation of t'e !ease& asset is in&e*en&ent of t'e *erio&ic !ease *a)#ent.

at t'e en& of eac' accontin" *erio&+

&e*reciation e0*ense-ca*ita! !eases 000 acc#!ate& &e*reciation-ca*ita! !eases 000

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Rent ;a)#ents.

- eac' rent *a)#ent consists of interest e0*ense+ a re&ction of !ease !ia$i!it) an&+ if an)+e0ector) costs to $e *ai& $) t'e !essor.

- to a!!ocate eac' *a)#ent $et%een a re&ction of !ease !ia$i!it) an& interest e0*ense+ se theeffective interest method.

e.". ass#e t'at t'e !essor *a)s t'e *ro*ert) ta0 for t'e !essee.

at !ease *a)#ents+

*ro*ert) ta0 e0*ense 000 interest e0*ense 000 o$!i"ations n&er ca*ita! !eases 000 cas' 000

at t'e en& of t'e accontin" *erio& to recor& accra!s+

interest e0*ense 000 interest *a)a$!e 000

&e*reciation e0*ense-ca*ita! !eases 000 acc#!ate& &e*reciation-ca*ita! !eases 000

*on e0*iration of t'e !ease+

if retrn t'e !ease& asset to t'e !essor an& resi&a! (a!e is not "arantee&+

acc#!ate& &e*reciation - ca*ita! !eases 000 !ease& e4i*#ent - ca*ita! !eases 000

if retrn t'e !ease& asset to t'e !essor an& resi&a! (a!e is "arantee&+

o$!i"ations n&er ca*ita! !ease 000 acc#!ate& &e*reciation - ca*ita! !eases 000 !ease& e4i*#ent - ca*ita! !eases 000 if t'e #aret (a!e of t'e asset on ter#ination is !o%er t'an t'e "arantee& (a!e+

!oss on ca*ita! !ease 000 cas' 000i!&in".1 if one of t'e first t%o criteria are #et.

i. Lessee. ca*ita! !ease $i!&in" an& !an& s'o!& $e se*arate!) c!assifie&

ii. Lessor. ca*ita! !ease $i!&in" an& !an& s'o!& $e recor&e& as a sin"!e nit.

2 if none of t'e first t%o criteria are #et if t'e fair (a!e of t'e !an& is !ess t'an 26/ oft'e tota!.

i. Lessee. treat as a sin"!e nit. an o*eratin" !ease.

ii. !essor. treat as a sin"!e nit. an o*eratin" !ease.

if none of t'e first t%o criteria are #et if t'e fair (a!e of t'e !an& is 26/ or #ore oft'e tota!.

i. Lessee. treat se*arate!).

ii. Lessor. treat se*arate!).