Essay about Lease Calculation

Submitted By kabumybudi
Words: 771
Pages: 4
Open Document
The essential difference between an operating and a finance lease is that in the former the benefits and costs of ownership remain with the lessor but with the latter they pass to the lessee. In other words, an operating lease is a hiring arrangement while a finance lease is a financing arrangement. The essential difference may be illustrated in another way. An operating lease is likely to exist if acquiring legal ownership of the property is not a viable option, for example because the lessee’s need for the resource is short-term. On the other hand, a finance lease is likely to exist if acquiring legal ownership is regarded as a possible way of obtaining the services provided by the property.
In summary, the capitalisation treatment will result in an increased debt ratio (implying higher financial risk, an increase in the rates of interest on debt, and a reduced credit rating) and lower return on total assets (implying inferior operating performance and possibly reduced management incentives such as bonuses).
Managers will not be indifferent to the choice between these treatments. They have strong incentives to favour the expense treatment and to ensure that leases are classified as operating leases. Empirical accounting research shows that following the introduction of accounting standards that mandated the operating/finance lease distinction, many lessees restructured their leases to ensure that they could be classified as operating leases and qualify for off-balance sheet treatment.
According to AASB 117, to determine whether a lease is a finance lease we must examine whether substantially all the risks and rewards incidental to ownership are transferred from the lessor to the lessee. Rewards of ownership of assets include the use of the asset and the benefit of any increased value of the asset. The lease clearly transfers the reward of use of the asset to the lessee, but only for a period equal to 40% of the asset’s expected useful life. The reward of any increase (or the risk of any decrease) in value remains with the lessor. This is indicated by the unguaranteed residual value. Risks of ownership include losses due to theft, damage or obsolescence; risks associated with declines in asset values. The risks of loss are transferred to the lessee, who is responsible for insuring the asset. A further indicator is the relationship between the present value of the lease payments and the fair value of the asset being leased. The present value of 24 monthly payments of $2 750 given a rate of interest of 0.5% is $62 048 (89.9% of fair value). Is this ‘at least substantially all’? A further issue in this case is that if the lessee cancels the lease he is liable to pay ($2 750 × 12 =) $33 000. This is a substantial penalty and, according to para. 11 of AASB 117, is an indicator that the lease could be classified as a finance lease. Overall, a majority of risks and rewards of ownership are transferred to the lessee, but not all. Given the incentives of lessee’s to classify leases as operating, it seems likely that this lease would be classified in that manner.
P12.5
Lessor’s Books: XYZ Company PV of lease payments = $15 000 + = $71 861 Given that this is a dealer or manufacturer lease, we assume that 10% is the market rate of interest, and there is no unguaranteed residual. Based on these assumptions, the journal entries would be as follows:

_________________________________________________________________ 1 July 2009 Lease receivables Dr $71 861 Cost of goods sold Dr 52 000 Sales Cr $71 861 Inventory Cr 52 000 _________________________________________________________________ 1 July 2009 Cash at bank Dr $15 000 Lease receivables Cr $15 000 _________________________________________________________________ 30 June 2010 Interest
Show More

Related Documents: Essay about Lease Calculation

Essay about Accounting: Depreciation and Prepaid Rent

2011 Leased equipment (calculated above) 112,080 Lease payable (calculated above) 112,080 Lease payable 15,000 Cash (lease payment) 15,000 Exercise 3 April 1, 2011 Interest expense (2% x [$112,080 – 15,000]) 1,942 Lease payable (difference) 13,058 Cash (lease payment) 15,000 July 1, 2011 Interest expense (2% x $84,022: from schedule) 1,680 Lease payable (difference) 13,320 Cash (lease payment) 15,000 October 1, 2011 Interest…

Words 618 - Pages 3

Case Study Of The BPO

option appears at the inception of the lease to be reasonably assured, payment of the option price ($6,000) is expected to occur when the option becomes exercisable (at the end of the eighth quarter). Also, the lease contract specifies that the BPO becomes exercisable before the designated lease term ends. Since a BPO is expected to be exercised, the lease term ends for accounting purposes when the option becomes exercisable (after two years of the three-year lease term). -------------------------------------------------…

Words 911 - Pages 4

Xacc/280 Week 1 Mini Case Paper

What are Citizens’ two largest asset categories? What is the largest liability category? What do these assets and liabilities indicate about the major services offered by Citizens? Citizens’ two largest asset categories are loans and leases and net loans and leases. The largest liability category is deposits. These assets and liabilities indicate that Citizens’ Bank provides a variety of banking services such as consumer loans, savings accounts, and mortgages. 2. What is the difference between a'smart'…

Words 684 - Pages 3

ProblemSet Solutions Chapter15 Essay

40,000 Depreciation expense ($350,000 ÷ 5 years) 70,000 Accumulated depreciation 70,000 Present Value of Minimum Lease Payments: ($10,000 x 10.78685*) = $107,866 lease present payments value * present value of an annuity due of $1: n=12, i=2% [i = 2% (8% ÷ 4) because the lease calls for quarterly payments] Requirement 1 Lease Amortization Schedule Lease Effective Decrease Outstanding Payments Interest in Balance Balance 2% x Outstanding Balance 107,866 1 10,000…

Words 1021 - Pages 5

Assignment 1 Essay

files through the Data files link under the Course Modules tab, then follow the instructions for downloading and saving the files. E. For questions involving mathematical calculations, you must show your calculations to receive maximum marks. For questions with computer components, follow the given procedure. F. Adopt a consistent approach to rounding in your calculations. Here are some general guidelines: Round all currency numbers to two decimals. For $ million, you may omit decimals. For example, $18,824.68 × 542 =…

Words 2340 - Pages 10

Essay on Kpmg Accounting for Lease Extension

Studies SOLUTIONS Case: Accounting for Lease Extension (Revised and updated 5/2013) Jack leases an office building from Jill. The lease is classified as an operating lease under the guidance of ASC Topic 840, Leases. The lease does not include any renewal options upon the expiration, but Jack is in the process of negotiating an extension of the lease. Jack proposes to make a single up-front payment of $1.2 million to Jill in exchange for an extension of the lease at the current rate for another 10 years…

Words 1860 - Pages 8

Advanced Corporate Finance AFC3140 Essay

βe (Rm – Rf) Equity beta () is a parameter that measures how sensitive cash flows to E holders are to movements within the market. It reflects E holders’ exposure to both business risk and financial risk. βe = β0 + (β0 – βd) (D/E) Optimal value calculation (limited to corporate taxation and bankruptcy costs) For levered companies corporate taxation provides a tax shield because of the deductibility of interest payments which increases company value, however, the probability of default imposes a present…

Words 2032 - Pages 9

Rapid Review Kieso V2 Essay

Interest payments are based on stated rate and face value of principal. Present value calculations are based on the market rate of interest, for example: Stated rate Market rate Bond issued at 5% 5% 5% 4% 5% 6% Premium Par Discount © 2013 John Wiley & Sons Canada, Ltd. 1 Kieso 10th Ed._RAPID REVIEW 2_3rd pass_April 25, 2013 13-04-25 7:17 AM Page 2 Bond Discount and Premium Amortization Calculation Effective Interest Method Interest Expense Carrying value of debt at beginning of period…

Words 6807 - Pages 28

Essay on Mcdonald's Risk

Major risks and implications of those risks for the conduct of the audit. Financing and market risk The Company generally borrows on a long-term basis and is exposed to the impact of interest rate changes and foreign currency fluctuations. Debt obligations at December 31, 2007 totaled $9.3 billion, compared with $8.4 billion at December 31, 2006. The net increase in 2007 was primarily due to net issuances of $573 million and the impact of changes in exchange rates on foreign currency denominated…

Words 1254 - Pages 6

Essay about Salem Telephone Company

ACCT500_ET - MANAGERIAL DECISION SUPPORT Salem Telephone Company In this case, the fixed expenses with respect to revenue hours are the following: Custodial services Rent Computer leases Maintenance Depreciation of computer equipment, office equipment and fixtures Operations salaried staff Systems development and maintenance Sales promotions Corporate services Sales Sales Promotion Administration These are fixed costs because the cost driver revenue hours doesn’t impact them (for instance the rent…

Words 1035 - Pages 5