Intermediate accounting 13th kieso warfield chapter 21

Chapter 21-1 CHAPTER 21 ACCOUNTING FOR LEASES Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 21-2 Learning Learning Objectives Objectives Explain the nature, economic substance, and advantages of lease transactions Describe the accounting criteria and procedures for capitalizing leases by the lessee Contrast the operating and capitalization methods of recording leases Identify the classifications of leases for the lessor Describe the lessor’s accounting for direct-financing leases Identify special features of lease arrangements that cause unique accounting problems Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting Describe the lessor’s accounting for sales-type leases List the disclosure requirements for leases Chapter 21-3 Accounting Accounting for for Leases Leases Leasing Environment Accounting by Lessee Accounting by Lessor Who are players? Advantages of leasing Conceptual nature of a lease Capitalization criteria Accounting differences Capital lease method Operating method Comparison Economics of leasing Classification Direct-financing method Operating method Special Accounting Problems Residual values Sales-type leases Bargain purchase option Initial direct costs Current versus noncurrent Disclosure Unsolved problems Chapter 21-4 The The Leasing Leasing Environment Environment A lease is a contractual agreement between a lessor and a lessee, that gives the lessee the right to use specific property, owned by the lessor, for a specified period of time Largest group of leased equipment involves: Information technology, Transportation (trucks, aircraft, rail), Construction and Agriculture Chapter 21-5 LO Explain the nature, economic substance, and advantages of lease transactions The The Leasing Leasing Environment Environment Who Are the Players? Three general categories: Banks Captive leasing companies Independents Chapter 21-6 LO Explain the nature, economic substance, and advantages of lease transactions The The Leasing Leasing Environment Environment Advantages of Leasing 100% Financing at Fixed Rates Protection Against Obsolescence Flexibility Less Costly Financing Tax Advantages Off-Balance-Sheet Financing Chapter 21-7 LO Explain the nature, economic substance, and advantages of lease transactions The The Leasing Leasing Environment Environment Conceptual Nature of a Lease Capitalize a lease that transfers substantially all of the benefits and risks of property ownership, provided the lease is noncancelable Leases that not transfer substantially all the benefits and risks of ownership are operating leases Chapter 21-8 LO Explain the nature, economic substance, and advantages of lease transactions The The Leasing Leasing Environment Environment The issue of how to report leases is the case of substance versus form Although technically legal title may not pass, the benefits from the use of the property Operating Lease Journal Entry: Rent expense Cash xxx xxx Capital Lease Journal Entry: Leased equipment Lease liability xxx xxx A lease that transfers substantially all of the benefits and risks of property ownership should be capitalized (only noncancellable leases may be capitalized) Chapter 21-9 LO Explain the nature, economic substance, and advantages of lease transactions Accounting Accounting by by the the Lessee Lessee If the lessee capitalizes a lease, the lessee records an asset and a liability generally equal to the present value of the rental payments Records depreciation on the leased asset Treats the lease payments as consisting of interest and principal Typical Journal Entries for Capitalized Lease Chapter 21-10 Illustration 21-2 LO Describe the accounting criteria and procedures for capitalizing leases by the lessee Illustration 21A-3 Chapter 21-73 LO 10 Understand and apply lease accounting concepts to various lease arrangements Chapter 21-74 LO 10 Understand and apply lease accounting concepts to various lease arrangements Illustration 21A-4 Chapter 21-75 LO 10 Understand and apply lease accounting concepts to various lease arrangements Chapter 21-76 LO 10 Understand and apply lease accounting concepts to various lease arrangements Illustration 21A-5 Chapter 21-77 LO 10 Understand and apply lease accounting concepts to various lease arrangements The term sale-leaseback describes a transaction in which the owner of the property (seller-lessee) sells the property to another and simultaneously leases it back from the new owner Advantages: May allow seller to refinance at lower rates May provide another source of working capital, particularly when liquidity is tight By selling the property, the seller-lessee may deduct the entire lease payment, which is not subject to alternative minimum tax considerations Chapter 21-78 LO 11 Describe the lessee’s accounting for sale-leaseback transactions Determining Asset Use To the extent the seller-lessee continues to use the asset after the sale, the sale-leaseback is really a form of financing  Lessor should not recognize a gain or loss on the transaction If the seller-lessee gives up the right to the use of the asset, the transaction is in substance a sale  Chapter 21-79 Gain or loss recognition is appropriate LO 11 Describe the lessee’s accounting for sale-leaseback transactions Lessee If the lease meets one of the four criteria for treatment as a capital lease, the seller-lessee should  Account for the transaction as a sale and the lease as a capital lease  Defer any profit or loss it experiences from the sale of the assets that are leased back under a capital lease  Amortize profit over the lease term Chapter 21-80 LO 11 Describe the lessee’s accounting for sale-leaseback transactions Lessee If none of the capital lease criteria are satisfied, the seller-lessee accounts for the transaction as a sale and the lease as an operating lease  Lessee defers such profit or loss and amortizes it in proportion to the rental payments over the period when it expects to use the assets Exceptions:  Losses Recognized and Minor Leaseback Chapter 21-81 LO 11 Describe the lessee’s accounting for sale-leaseback transactions Lessor If the lease meets one of the criteria in Group I and both of the criteria in Group II, the purchaser-lessor records the transaction as a purchase and a directfinancing lease If the lease does not meet the criteria, the purchaserlessor records the transaction as a purchase and an operating lease Chapter 21-82 LO 11 Describe the lessee’s accounting for sale-leaseback transactions Sale-Leaseback Example American Airlines on January 1, 2011, sells a used Boeing 757 having a carrying amount on its books of $75,500,000 to CitiCapital for $80,000,000 American immediately leases the aircraft back under the following conditions: The term of the lease is 15 years, noncancelable, and requires equal rental payments of $10,487,443 at the beginning of each year The aircraft has a fair value of $80,000,000 on January 1, 2011, and an estimated economic life of 15 years American pays all executory costs American depreciates similar aircraft that it owns on a straight-line basis over 15 years Chapter 21-83 The annual payments assure the lessor a 12 percent return American’s incremental borrowing rate is 12 percent LO 11 Describe the lessee’s accounting for sale-leaseback transactions Sale-Leaseback Example This lease is a capital lease to American because  lease term exceeds 75 percent of the estimated life of the aircraft and  present value of the lease payments exceeds 90 percent of the fair value of the aircraft to CitiCapital Assuming that collectibility of the lease payments is reasonably predictable and that no important uncertainties exist in relation to unreimbursable costs yet to be incurred by CitiCapital, it Chapter 21-84 should classify this lease as a direct-financing lease LO 11 Describe the lessee’s accounting for sale-leaseback transactions Sale-Leaseback Example Chapter 21-85 LO 11 Describe the lessee’s accounting for sale-leaseback transactions Sale-Leaseback Example Chapter 21-86 LO 11 Describe the lessee’s accounting for sale-leaseback transactions Copyright Copyright Copyright © 2009 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Chapter 21-87 .. .CHAPTER 21 ACCOUNTING FOR LEASES Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 21- 2 Learning Learning Objectives Objectives... lease accounting Describe the lessor’s accounting for sales-type leases List the disclosure requirements for leases Chapter 21- 3 Accounting Accounting for for Leases Leases Leasing Environment Accounting. .. independent accounting processes Chapter 21- 19 LO Describe the accounting criteria and procedures for capitalizing leases by the lessee Accounting Accounting by by the the Lessee Lessee E21-1 (Capital