At the inception of a capital lease, the lessee should recognize the value of the asset and the liability of the capital lease equivalent to the present value of the lease rentals and bargain option (Simple Studies). The relevant discount rate is the lessor’s implicit rate or the leases after tax cost of borrowing (Simple Studies). The lessee will then depreciate the asset in the same way as a purchased asset. The accounting entries at the inception of the lease are as follows:
Dr Cr
At inception: Asset PV of lease obligations
Liability PV of lease obligations
At end of year 1, the lessee will record the depreciation of the assets and the reduction in the lease obligation every time they make a lease payment. The asset will be depreciated over its useful life since the asset will be transferred to the lessee at the end of the lease.
At the end of the lease term, the lease obligation will be paid off.
The operating lease does not require the lessee to recognize the lease obligations and if there are, no changes in the lease rentals the lease rentals are expensed as they are incurred. However, if the lease rentals were not even, they would have to be accrued. For instance, assuming a firm leases office space for two years for a monthly a constant monthly rent of $5,000. The relevant entries would be as follows.
Dr Cr
Rent expense $5,000
Cash $5,000
However, if the previous example rent were to increase by $1,000 from the 13th – 24th month, the average rent over the period would be $5,500.
Month 1 -12
Dr Cr
Rent expense $5,500
Deferred liability $500
Cash $5,000
Month 13- 24
Dr Cr
Rent expense $5,500
Deferred liability $500
Cash $6,000
At the end of the lease term, the deferred liability will fall to zero.
Part 2
The key difference between a sales-type lease and direct financing is the presence of a dealers profit in the sales-type lease (Flood). At inception, the dealers profit is the difference between the sale-type must record the profit and the cost of goods sold. To complete the recording of a sales type-lease, one must have the following four pieces of information (Flood).
The gross investment is the minimum lease payments receivable plus any guaranteed residual value of the asset at the end of the lease term and is recorded as an asset at inception of the lease (Flood).
Unearned interest is the difference between the gross investment and the fair value of the asset. The unearned interest revenue is amortized over the lease term.
The present value of the minimum lease payment is recorded as the sales value of the asset.
Cost of goods sold is the cost of the asset to the lessor less the present value of any guaranteed residual value at the end of the lease term.
Works cited
Flood, Joanne M. Wiley GAAP 2016 - Interpretation And Application Of Generally Accepted
Acco. John Wiley & Sons, 2016. Print.
Simple Studies,. "Capital Lease Accounting By Lessee - Accounting Guide |
Simplestudies.Com". Simplestudies.com. N.p., 2016. Web. 5 Apr. 2016.
