cost accounting chapter 21 notes

7/24/2019 Cost Accounting Chapter 21 NOTES

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Chapter 21: Accounting for Leases

The Leasing EnvironmentA lease is a contractual agreement between a lessor and a lessee, that givesthe lessee the right to use specifc property, owned by the lessor, or a

specifed period o time.

Largest group o leased equipment involves:

Inormation technology,

Transportation truc!s, aircrat, rail",

#onstruction and

Agriculture.

Advantages of Leasing$. $%%& 'inancing at 'i(ed )ates.*. +rotection Against bsolescence.

-. Less )estrictive ebt #ovenants./. Less #ostly 'inancing.0. 123alance24heet 'inancing.

Conceptual Nature of a LeaseCapitalize a lease that transfers substantially all of the riss andbene!ts of property o"nership, provided the lease is noncancellable.

Leases that do not transer substantially all the ris!s and benefts oownership are operating leases.

The issue o how to report leases is the case o substance versus form.Although legal title may not pass to the lessee, the benefts rom the use othe property do.

#perating Lease$ournal Entry:)ent e(pense (((

#ash (((

Capital Lease$ournal Entry:Leased equipment (((

Lease obligation (((

A lease that transers substantially all o the ris!s and benefts o propertyownership should be capitali5ed only noncancellable leases may becapitali5ed".


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4tatement o 'inancial Accounting 4tandard 6o. $-, 7Accounting or Leases,8$9;

Accounting by the LesseeI the lessee capitali5es a lease, the lessee records an asset and a liability

generally equal to the present value o the rental payments. )ecords depreciation on the leased asset.

Treats the lease payments as consisting o interest and principal.

Leases thatmeet any one of the follo"ing four criteria are capitalleasesor the lessee:

$. Title Transfersto the lessee.*. Lease contains a bargain purchase option.-. Lease termis % &' percent o the estimated economic lie o the

leased property./. The present value of the minimum lease payments e(cluding

e(ecutory costs" is % () percento the air mar!et value o theleased property.

Transferof

#"nership

,argain-urchase

Lease Term./ &'0

- of-ayments./ ()0

#p

er

ating

Lease

No No No

No

es

Capital Lease

Lease Agreement

es es es

Leases that 3# N#Tmeet any of the fourcriteria are accounted foras #perating Leases.

Accounting by the Lessee

-resent alue of the 4inimum Lease -ayments for Lessee$. E5clude E5ecutory costsinsurance6 ta5es6 and maintenance"

rom the +< calculation.*. 7nclude guaranteed residual valueat the end o the lease term

guaranteed by the lessee".-. 3iscount rate: =se the lessee>s incremental borrowing rate unless

the lessor>s implicit rate is !nown to be less than the lessee>s


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incremental borrowing rate. ? i the lessee !nows both rates, use therate that>s lower"

Accounting by the Lessee8ecovery of 7nvestment Test 9()0 of 4 Test;

- of 4inimum lease payments include:

@inimum rental payment

uaranteed residual value

+enalty or ailure to renew

3argain purchase option

E5ecutory Costs E5cluderom +< o @inimum Lease +aymentcalculation":

Insurance

@aintenance

Ta(es

Lessee 3epreciation -eriod

ITitle transers, or i there is a 3+, depreciate the asset over the

economic lie o the asset.

therwise, depreciate over the term o the lease.

Accounting by the Lessee * E


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,ure Corp? What type of lease is this? Explain.

Capitalization Criteria:

1.Transfer of ownership

2.

Bargain purchase option

3.Lease term ! "#$ ofeconomic life of leasedproperty

%.&resent 'alue of minimumlease payments ! ()$ of

*+, of property

N#

N#

Lease term # yrs.Economic life - yrs.

E@ +>?>0

*+, of leasedproperty is unnown.

Capital Lease6 >

Chapter21*1B

,ure Corp?present value of the minimum lease payments.

* PV Annuity Due, Table 6-5.

&ayment / 0--0

&resent 'alue factor 9i/1)06n/'; %.1-(0-

&, of minimum lease payments /3-1%%

$ o u r n a l e n t r y1 1 1 3 L e a s e a c i n e n e r a p i t a L e a s e

L e a s e i a 6 i i t y 3 - 1 % %

L e a s e i a i i t y a s


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,ure Corp? Lease Amortization @chedule

1 ) $L e a s e 7 n t e r e s t 8 e d u c t i o n L e a s e

9 a t e & a y m e n t E x p e n s e i n L i a 6 i l i t y L i a 6 i l i t y1 1 2 ) 1 3 3 - 1 % %/

1 1 2 ) 1 3 0 - - 0/ 0 - - 0/ 2 " % " -

1 1 2 ) 1 % 0 - - 0 2 " % 0 # ( 2 ) 2 1 # # -

1 1 2 ) 1 # 0 - - 0 2 1 # - - # 1 2 1 # ) % %

1 1 2 ) 1 - 0 - - 0 1 # ) % " 1 - % " 0 0 )

1 1 2 ) 1 " 0 - - 0 " 0 0 " 0 0 ) )

:ournal entries for Bure 5orp. through :an. 1 2)1%.

$ o u r n a l e n t r y

1 2 3 1 1 3 9 e p r e c i a t i o n e x p e n s e " 2 2 (

; c c u m u l a t e d d e p r e c i a t i o n " 2 2 (

9 D > 6 1 B B E ' / D & 6 2 2 ( ;

7 n t e r e s t e x p e n s e 2 " % 0

7 n t e r e s t p a y a 6 l e 2 " % 0

F 9 D > 6 1 B B G D + 6 + ; < ? 1 ) H

:ournal entries for Bure 5orp. through :an. 1 2)1%.

$ o u r n a l e n t r y

1 1 1 % L e a s e l i a 6 i l i t y # ( 2 )

7 n t e r e s t p a y a 6 l e 2 " % 0

5 a s h 0 - - 0


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,ure Corp?

Comparison of Capital Lease "ith #perating Lease

C a p i t a l L e a s e # p e r a t in g

9 e p r e c i a t i o n 7 n t e r e s t L e a s e9 a t e E x p e n s e E x p e n s e T o t a l E x p e n s e 9 i f f .

2 ) 1 3 " 2 2 (/ 2 " % 0/ ( ( " "/ 0 - - 0/ 1 3 ) (/

2 ) 1 % " 2 2 ( 2 1 # - ( 3 0 # 0 - - 0 " 1 "

2 ) 1 # " 2 2 ( 1 # ) % 0 " 3 3 0 - - 0 - #

2 ) 1 - " 2 2 ( " 0 0 0 ) 1 " 0 - - 0 < - # 1 =

2 ) 1 " " 2 2 0 " 2 2 0 0 - - 0 < 1 % % ) =

3 - 1 % %/ " 1 ( -/ % 3 3 % )/ % 3 3 % )/ )

I rounding

I

Accounting by the Lessor

any one of the conditions in group 1 and both in group 2 are


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reJuired for a lease to be treated as a capital lease by the lessor?

Accounting by the LessorClassi!cation of Leases by the Lessor

$. perating Lease.

*. #apital Lease:a. 3irect*!nancing leaseno dealer proft, e(cept interest".b. @ales*type leasecontains dealer proft because '@< Asset

Lessor>s 3< o the Asset".

Classification of Leases by the Lessor

A lessor may classify a lease as an operating leasebut the

lessee may classify the same lease as a capital lease?

3irect*inancing Lease E5ercise'ieval Leasing #ompany signs an agreement on $J$J$% to lease equipment to)eid #ompany.

$. Term o the lease and economic lie o asset is ; years.*. #ost and air value o the asset is C-/-,%%%.-. Asset will revert to lessor at end o the lease./. G(pected )< is C;$,%$, none o which is guaranteed.

0. )eid #ompany assumes direct responsibility or e(ecutory costs.;. Gqual annual payments begin on $J$J$% lessor desires $%& rate o

return".. roup II conditions are met


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Calculation of Lease Payment

8 e s i d u a l ' a l u e - 1 ) " 1/

& , o f s i n g l e s u m < i ! 1 ) $ n ! - = ) . # - % % "

- o f r e s i d u a l v a l u e 3 % % " 3/

* a i r m a r e t ' a l u e o f l e a s e d e > u i p m e n t 3 % 3 ) ) )/

& r e s e n t ' a l u e o f r e s i d u a l ' a l u e < 3 % % " 3 =

A m o u n t t o b e r e c o v e r e d t h r o u g h l e a s e p a y m e n t 3 ) 0 # 2 "

& , f a c t o r o f a n n u n i t y d u e < i ! 1 ) $ n ! - = % . " ( ) " (

A n n u a l p a y m e n t r e J u i r e d - % % ) )/

3irect* inancing Lease E5ercise

9Computation of Lease -ayment;

5

*

Calculation of Lease -ayment+< K +ayment" +< 'actor, $%&, ;" C-%D,0* K +ayment" /.9%9"C-%D,0*J/.9%9 K +aymentC-%D,0*J/.9%9 K C;/,/%%

3irect* :inancing Lease E5ercise

LessorKs Amortization @chedule


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$ ournal entries for the lessor for 2)1) and 2)11

111) Lease 8ecei'a6le 3%3)))

E>uipment 3%3)))

111) 5ash -%%))

Lease 8ecei'a6le -%%))

12311) 7nterest 8ecei'a6le 2"0-)

7nterest 8e'enue 2"0-)

$ ournal entries for the lessor for 2)1) and 2)11

1111 5ash -%%))

Lease 8ecei'a6le 3-#%)

7nterest 8ecei'a6le 2"0-)

123111 7nterest 8ecei'a6le 2%2)-7nterest 8e'enue 2%2)-

Lessee Accounting for 8esidual alueThe present value of the minimum lease payments includes theguaranteed residual valuebut e(cludes the unguaranteed residual value.

7llustration: @ee previous e5ample:- of =nguaranteed 8 "as deducted before calculating Lease-ayment?

Lessee Computations Entries7llustrationn Ban. $, *%%;,


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G(ceptional computer #ompany used a rate o $%& in setting annual rentals.#ollection o the rentals is reasonably predictable and there are no importantuncertainties regarding uture unreimbursable costs to be incurred by thelessor.

Is this a #apital Lease to the LesseeF

Cha ter

7 llustration 9LE@@EE;What type of lease is this? Explain.

Capitalization Criteria:

1.Transfer of ownership

2.Bargain purchase option

3.Lease term ! "#$ of

economic life of leasedproperty

%.&resent 'alue of minimumlease payments ! ()$ of*+, of property

N#

N#

Lease term % yrs.

Economic life % yrs.E@ 1))$

/1"2)0 3.%0-0# !/-))))

7 llustration 9LE@@EE;&repare an amorti@ation schedulethat would 6e suita6le for ,elde.

1 ) 0

L e a s e 7 nt e r e s t 8 e d u c t io n o f L e a s e

3 a t e - a y m e n t E 5 p e n s e L ia b il it y L ia b i lit y

1 M 1 M ) C C ) 6 ) ) )D

1 M 1 M ) C 1 & 6 2 ) +D 1 & 6 2 ) +D B 2 6 & ( 2

1 M 1 M ) & 1 & 6 2 ) + B 6 2 & ( 1 2 6 ( 2 ( 2 ( 6 + C >

1 M 1 M ) + 1 & 6 2 ) + 2 6 ( + C 1 B 6 2 2 2 1 ' 6 C B 1

1 M 1 M ) ( 1 & 6 2 ) + 1 6 ' C & 1 ' 6 C B 1 *


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8 e s i d u a l ' a l u e # ) ) )/& , o f s i n g l e s u m < i ! 1 ) $ n ! % = ) . - 0 3 ) 1

& , o f r e s i d u a l ' a l u e 3 % 1 #/

5 o s t o f e > u i p m e n t t o 6 e r e c o ' e r e d - ) ) ) )/

& r e s e n t ' a l u e o f r e s i d u a l ' a l u e < 3 % 1 # =

; m o u n t t o 6 e r e c o ' e r e d t h r o u g h l e a s e p a y m e n t # - # 0 #

& , f a c t o r o f a n n u n i t y d u e < i ! 1 ) $ n ! % = 3 . % 0 - 0 #

; n n u a l L e a s e p a y m e n t r e > u i r e d 1 - 2 2 0/

LE@@#8 our* year lease/-) asset

cost accounting chapter 21 notes

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