Finance Lease- Lessee DETERMINATIVE: 1. transfer of ownership 2. BPO 3. 75% of economic life 4. PV of MLP= 90% of FV SUGGESTIVE: 1.

Only lessee can use 2. Losses born by lessee 3. G/L accrue to lessee 4. continue lease for a lower amount

CASES Bargain Purchase Option -include PV of BPO Guaranteed Residual Value -issue on initial direct cost vs. executory cost

Depreciation: 1. Check if the finance lease falls on number 1 and 2 or 3 and 4. 2. Ignore residual value if unguaranteed residual value 3. If GRV, consider the guaranteed not the estimated RV Even if cancellable, it is still non-cancellable: 1. lease canceled only for remote contingency 2. canceled with permission of lessor 3. enter in same or equivalent asset with same lessor 4. lease canceled with penalty of a magnitude

CASES Unguaranteed Residual Value -ignore RV in depreciation

Land and building lease: - allocate MLP bet land and building Capitalized Cost: -lower of FV or PV of MLP What is MLP? 1. Rental payment 2. Any payment req under BPO 3. Any GRV Contingent rent and executory costs not in MLP Executory vs. IDC -executory-expense immediately -IDC- add to asset, not to liab

Actual Purchase of Leased Asset CA of leased asset Cash payment LESS: Lease liability =TOTAL cost Disclosures for Finance Lease- Lessee: 1. Net CA of each class of asset 2. Reconciliation bet total min MLP and their PV 3. Total future MLP at end of pd and their PV: a. not later than one year b. later than one year and not later than 5 years c. later than 5 years 4. Contingent rents recognized as expense 5. Total future min sublease payments expected 6. General description of lessee's material leasing arrgmt FORMULA for Disclosure of future lease payments Remaining future lease payments Executory costs Guaranteed residual value ALL UNDISCOUNTED!!!

Finance Lease- Lessor (Direct Financing Lease) Gross Investment =gross rental for entire lease term + residual value (UNDISCOUNTED) Net Investment=cost of asset plus any initial direct cost UII=GI-NI

Case 1: Plain ISSUE: DETERMINE ANNUAL RENTAL Annual Rental=NI/PVFA L/R Machinery UII Cash L/R UII II

Case 2: With initial direct cost ISSUE: DETERMINE RATE NINV=Cost+IDC PVFA=NINV/annual payment UII=LR-NINV New interest rate is LOWER than original Machinery (for IDC) Cash Lease Receivable Machinery UII Cash Lease Receivable UIII II Lease Receivable is partly C and Non-C

REMEMBER to use the

CASES Case 3: With residual value (will revert) ISSUE: DETERMINE ANNUAL RENTAL will REVERT to lessor since there is no TofT or BPO STEP 1: Achieve the annual rental Cost (PV of residual value) =NI recovered from rental / PVAF =Annual Rental BATAS NG BUHAY: If asset will revert, subtract residual value from cost Otherwise, ignore RV completely STEP 2: Normal Procedures Gross Rentals

+Residual Value (guaranteed or unguaranteed, but if it will not revert, ignore!)

=Gross Investment (Net investment plain) =UII LR Machinery at cost UII Cash LR UII II whether unguaranteed or unguaranteed, at the end of lease term: Machinery LR

MBER to use the cost of asset in the amortization table!!

Case 4: With residual value (will not revert)

ISSUE: Do not deduct PV of residual value, IMMEDIATELY divide by PVAF to get Annual Rental
LR Machinery UII Cash LR UII II Cash LR UII II

able!!

Finance Lease- Lessor (Sales Type Lease) Gross Investment =gross rental for entire lease term + residual value (UNDISCOUNTED) Net Investment/sometimes also the SALES=PV of gross rentals plus PV of residual value(guaranteed/unguaranteed) UII=GI-NI Sales= NI or FV, whichever is LOWER COS=cost of asset sold + any initial direct cost IDC=expensed immediately

Case 1: without residual value GUARANTEED Gross Investment (Net Investment) =Unearned interest income Gross Rentals Guaranteed Residual Value @ Lease Receivable/ Gross Investment PV Gross Rentals

Cases Case 2: with residual value UNGUARANTEED

PV of rentals- sales (Cost of machinery- cost of sales) =Gross profit on sale LR Sales UII COS Inventory Cash Lease Receivable UII II

PV GRV & Total Present Value/ Net Investment @ Lease Receivable & (Total PV) =Unearned Interest Income & Sales/ Total PV (Cost of Sales) (Initial direct cost) =Gross Income

same computation whether guaranteed or unguaranteed

Sales excluding PV of URV (Cost of Sales less PV of unguaranteed RV) (Initial direct cost) =Gross Income

Sale of Leased Asset -difference bet sales and CA is in P/L -CA=LR-UII Cash UII Loss on Sale of leased equipment Lease receivable

Disclosures 1. reconciliation bet GI and PV of MLR 2. gross investment in lease and PV of min LP a. not later than one year b. later than one year and not later than 5 years c. later than 5 years 3. Unearned interest income 4. Unguaranteed RV (accruing to the benefit of lessor) 5. Accumulated allowance for uncollectible MLP receivable 6. Contingent rents recognized as income 7. general desc of lessor's material leasing arrgmnt

Case 3: with bargain purchase option Gross Rentals Bargain Purchase Option Lease Receivable/ Gross Investment PV of gross rentals PV of BPO Total Present Value/ Net Investment Lease Receivable (Total PV) =Unearned Interest Income Sales/Total PV (Cost of Sales) =Gross INCOME

Read the book, maikli lang naman eh hahaha