Exercise 15-29

When the leaseback is an operating lease, the gain is amortized over the lease term under U.S. GAAP. But, under IAS No. 17, the gain is recognized immediately:

January 1, 2011

Cash(given) 800,000 Accumulated depreciation (cost – carrying amount) 350,000 Building (original cost) 1,000,000 Gain on sale-leaseback (difference) 150,000

December 31, 2011

Rent expense 100,000 Cash(lease payment) 100,000

Exercise 15-30

Requirement 1

The specific citation that specifies the disclosure requirements pertaining to a seller-lessee in a sale-leaseback transaction is FASB ACS 840–40–50–1: “Leases–Sales-Leaseback Transactions–Disclosure.”

Requirement 2

The financial statements of a seller-lessee should include a description of the terms of the sale-leaseback transaction, including future commitments, obligations, provisions, or circumstances that require or result in the seller-lessee's continuing involvement.

FASB ACS 840–40–50–2 also indicates that the lessee should disclose a general description of its leasing arrangements including, but not limited to, the basis on which contingent rentalpayments are determined, terms of renewal or purchase options and escalation clauses, and restrictions imposed byleaseagreements.

Exercise 15-31

Note:

Because exercise of the option appears at the inception of the lease to be reasonably assured, payment of the option price ($100,000) is expected to occur when the option becomes exercisable (at the end of the 10^th year). When the leased property includes both land and a building and the lease is expected to transfer ownership by exercise of a BPO, the lessee should record each leased asset separately. The present value of the minimum lease payments is allocated between the leased land and leased building accounts on the basis of their relative fair values.

Present value of lease payments ($200,000 x 6.75902^**) $1,351,804

Plus: Present value of the BPO price ($100,000 x .38554^*) 38,554

Present value of minimum lease payments $1,390,358

^* present value of $1: n=10, i=10%

^** present value of an annuity due of $1: n=10, i=10%

January 1, 2011

Leased land(fair value) 400,000 Leased building ($1,390,358 – 400,000) 990,358 Lease liability (calculated above) 1,390,358 Lease liability 200,000 Cash (annual lease payment) 200,000

December 31, 2011

Depreciation expense ([$990,358 – 150,000] ÷ 20 years)42,018 Accumulated depreciation – leased building 42,018 Interest expense ([$1,390,358 – 200,000] x 10%) 119,036 Interest payable 119,036

Exercise 15-32

The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles. The specific citation for each of the following items is:

1. Definition of a bargain purchase option:

FASB ACS 840–10–20: “Leases–Overall–Glossary.” Also found in Master Glossary.

2. Lessor’s gross investment in a sales-type lease:

FASB ACS 840–30–30–6: “Leases–Capital Leases–Initial Measurement–Gross Investment in a Sales-Type Lease or Direct Financing Lease–Gross Investment in a Sales-Type Lease or Direct Financing Lease.

3. The disclosures required in the notes to the financial statements for an operating lease.

FASB ACS 840–20–50: “Leases–Operating Leases–Disclosure.”

FASB ASC 840–20–50–1: "Leases–Operating Leases–Disclosure–Lessees"

4. The additional disclosures necessary in the notes to the financial statements if the operating lease has a lease term greater than one year.

FASB ASC 840–20–50–2: "Leases–Operating Leases–Disclosure–Lessee”

• 840 Leases > 40 Sale-Leaseback Transactions > 50 Disclosure

  • Lessees

50-1 In addition to the disclosure requirements of Subtopics  360-20  and  840-10 , the financial statements of a seller-lessee shall include a description of the terms of the sale-

leaseback transaction, including future commitments, obligations, provisions, or circumstances that require or result in the seller-lessee's continuing involvement.

• 840 Leases > 40 Sale-Leaseback Transactions > 50 Disclosure

  • Lessees

50-1 In addition to the disclosure requirements of Subtopics  360-20  and  840-10 , the financial statements of a seller-lessee shall include a description of the terms of the sale-leaseback transaction, including future commitments, obligations, provisions, or circumstances that require or result in the seller-lessee's continuing involvement.

• 840 Leases > 40 Sale-Leaseback Transactions > 50 Disclosure

  • Lessees

50-1 In addition to the disclosure requirements of Subtopics  360-20  and  840-10 , the financial statements of a seller-lessee shall include a description of the terms of the sale-leaseback transaction, including future commitments, obligations, provisions, or circumstances that require or result in the seller-lessee's continuing involvement.

CPA / CMA REVIEW QUESTIONS

CPA Exam Questions

1. b. The 4 year lease term is greater than 75% of the asset's 5 year life making this a capital lease.

2. b. $111,500

Present value at 1/1/11 $112,500

Payment made 12/30/11 $10,000

Interest portion for 2011 (8% × $112,500) (9,000)

Portion applied to the liability (1,000)

Capital lease liability 12/31/11 $111,500

3. a. The key point is to first calculate the annual payments required by the lease. Use the basic present value formula: Annual Payments × Present Value Factor = Present Value of Future Payments. Therefore: Annual Payments × 4.313 = $323,400; Annual payments = $323,400/4.313; Annual payments = $75,000. Then multiply the customer's $75,000 annual payment by 5 years for a total of $375,000. This figure represents Glade Co.'s gross Lease Receivable. The difference between the gross Lease Receivable and the present value of the future payments is the total amount of Interest Revenue that will be earned over the life of the lease ($375,000 – $323,400 = $51,600).

4. c. The profit on the sale is the difference between the cash selling price and the book value, $3,520,000 – $2,800,000 = $720,000. The interest is computed as follows:

Present value of minimum lease payments  

    and lease obligation, 7/1/11 $3,520,000

Initial payment made 7/1/11 (600,000)

Liability balance $2,920,000

Interest rate 10% = $292,000

For one-half year = $146,000

CPA Exam Questions (concluded)

5. a. In a capital lease with a bargain purchase option, the lessee will control the asset for its total useful life. Therefore, the depreciation should be allocated over the 8-year life of the asset. $240,000 cost – 20,000 salvage value = 220,000 / 8 years = $27,500 per year.

6. a. The guaranteed residual value is a promise made by the lessee that the lessor can sell the leased asset at the end of the lease for a guaranteed amount. Since this promise is a potential future payment, it must be included in the calculation of the present value of the lessee's future lease payments.

7. a. The capitalized lease liability should be the annual lease payments less the executory cost (real estate taxes) times the present value factor for an ordinary annuity of 1 for nine years at 9%. The calculation would be: ($52,000 – 2,000) × 6.0 = $300,000. The real estate taxes are a period cost and should be charged to expense.

8. a. Since the machine is being leased back for a minor part (present value of rentals is less than 10% of the value of the property at the date of the sale-leaseback), the sale and the lease are viewed separately and the entire $30,000 profit is recognized.

CMA Exam Questions

1. d. For both sales-type and direct-financing leases, the lessor’s gross investment in the lease is the amount of the minimum lease payments (which include periodic payments plus guaranteed residual value) plus any amounts of unguaranteed residual value. The net investment in the lease is equal to the gross investment, plus any unamortized initial direct costs, minus unearned income. The unguaranteed residual value is the expected value of the leased asset in excess of the guaranteed residual value at the end of the lease term.

2. d. A lessee records a lease as a capital lease if it meets any one of four criteria. Existence of a bargain purchase option is one of these criteria. If a lease involving land and a building contains a bargain purchase option or if the lease transfers ownership to the lessee at the end of its term, the lessee separately capitalizes the land and the building.

3. b. Initial direct costs have two components: (1) the lessor’s external costs to originate a lease incurred in dealings with independent third parties and (2) the internal costs directly related to specified activities performed by the lessor for that lease. In a sales-type lease, the cost, or carrying amount if different, plus any initial direct costs, minus the present value of any unguaranteed residual value, is charged against income in the same period that the present value of the minimum lease payments is credited to sales. The result is the recognition of a net profit or loss on the sales-type lease.

PROBLEMS