Q: How does one determine whether a particular lease is a capital lease or an operating lease? What entries are required in the general journals of a government fund and governmental activities at the government-wide level to record a capital lease at its inception?
Answer :
Lessee’s Perspective under IFRS:
According to the standards laid down by IFRS relating to lease accounting, the lease is classified by the economic substance of the transactions. Below are the situations under which the lease will be treated to be financing lease:
- If at the end of lease period, title of ownership is transferred to the lessee by lessor.
- The lease agreement allows the lessee to purchase the leased asset for a price that is lower than the fair market value of the leased asset.
- A major portion of asset’s economic life is covered in the lease term(period) of use of asset.
- The present value of the lease payments is equal to fair value of the leased asset.
- The specifications or use of leased asset is so specialized that only the concerned lessee can use such asset and that too without any significant modifications.
Lessee’s Reporting Perspective under GAAP:
The classification of lease under US GAAP is conceptually similar but rather more than IFRS. As per US GAAP, a lessee must treat a lease as a finance lease if any of the following criteria is met:
- If at the end of lease period, title of ownership is transferred to the lessee by lessor.
- Lease agreement contains the bargain purchase option which permits the lessee to purchase the leased asset at price lower than fair market value of the asset at some future date.
- The lease period is 75% or more of the asset’s economic life.
- The present value of the lease payments accounts for at least 90% of current fair market value of the leased asset.
i)Recording the capital lease at the inception of the lease:
Asset under Capital Lease A/c .Dr.
Q: If the General Fund of a certain city needs $6,720,000 of revenue from property taxes to finance estimated expenditures of the next fiscal year and historical experience indicated that 4% of the gross levy will not be collected, what should be the amount of the gross levy for property taxes?
Answer :
Amount required: $6720000
Non-Collection Rate: 4%
Gross levy to reach the budgeted amount to meet the expenditure: 672000* 100/(100-4)
=6720000*(100/96)
=$7000000
Hence, considering the 4% non-collection rate, the total gross levy should be $7000000.
Works Cited
Kaplan Inc. (2011). Non-Current Liabilities. In K. Schweser, Schweser Notes for CFA Exam- Financial Reporting and Analysis (pp. 245-265). USA: Kaplan Inc.
