Chapter 9 - Finance Lease-LESSEE

UNGUARANTEED RESIDUAL VALUE IS IGNORED!!! BOTH IN

COMPUTING FOR LEASE LIABILITY AND DEPRECIABLE AMOUNT
Lease is a FINANCE lease if it has any of the following:
1. Transfer of owenship
2. A Bargain purchase option
3. Lease Term/Life of Asset = 75% (at least)
4. Present Value of Lease Payments/Fair Value of Leased Assets = 90%
(at least)
Minimum Lease Payments
- Rental Payments
- Payments required under bagain purchase option
- Guaranteed Residual Value (in the absence of bargain purchase
option)
Recognition of Asset and Liability
- the lower of the Fair Value of the Leased Property at inception
date and Present Value of Minimum Lease Payments
- plus, in the case of Bargain Purchase Option, Present Value of
the Bargain Purchase Option
- plus, in the case of Guaranteed Residual Value, Present
Value of the Guaranteed Residual Value
- initial direct costs is part of the leased asset ONLY and SHOULD
NOT FORM PART OF LEASE LIABILITY!
- executory costs are expensed outright
Payment of Lease Liability (debit of lease liability)
- annual payments - interest expense = lease liability to be debited
Ammortization
- the difference between the face value of the rentals and its present
value is the interest to be ammortized using effective interest
method
Depreciation (conisder only Residual Value if it is
GUARANTEED, otherwise ignore it)
- use LIFE OF THE ASSET if the financial lease qualifies under any of
these:
- Transfer of ownership
- Bargain Purchase Option
- use the shorter between LIFE OF THE ASSET and LEASE TERM if

the financial lease qualifies under any of these:

- 75% criteria
- 90% criteria
Bargain Purchase Option (Initial Recognition of Liability &
Asset = Present Value of rental payments and Bargain
purchase option)
if it is exercised:
Lease Liability
xx (equal to bargain purchase option price)
Cash
xx
if not, recognize a loss equal to Carrying Amount of Asset minus
Lease Liability Balance:
Accumulated Dep.
xx
Lease Liability
xx
Loss on finance Lease xx
Asset
xx
Guaranteed Residual Value (Initial Recognition of Liability &
Asset = Present Value of rental payments and Guaranteed
Residual Value)
<ONLY IF GUARANTEED BY LESSEE & NOT A THIRD PARTY>
- the asset will revert back to the lessor at the end of lease term at the
amount equal to the Guaranteed Residual Value
- upon return, both the Carrying Amount of the asset and Lease
Liability(add accrued interest payable if any) should always be equal to
the Guaranteed Residual Value
- NOTE: if the Fair Value at return date is lower than the guaranteed
Residual Value, a loss should be recorded as follows:
Loss on Finance Lease xx (difference between FV and
Guaranteed Residual Value)
Cash
xx
- no entry is needed if the FV is higher than the Guaranteed Residual
Value
Actual Purchase of Leased Asset
Cost of Asset = Carrying Amount of Leased Asset + Cash Payment Balance of Lease Liability