University:
Widener University
Course:
COMPSCI 345 | Practice and Applications of Data Management
Academic year:

2023
Views:

440

Pages:

4
Author:

empedradak

Long-Term Liabilities: Leases & Bonds RECITATION AGENDA Long-Term Liabilities: Leases & Bonds Agenda • • • • Terminology Criteria for Lease Capitalization Balance Sheet Equation Effects Sample Problems Long-Term Liabilities: Leases & Bonds LONG-TERM LIABILITIES – LEASES Terminology y Operating Lease - lessee rents the property. Lessee charges rent expenses as they become due in each period. y Capital Lease - lessee essentially owns the property. Lessee records the leased asset in the balance sheet (i.e. capitalized) together with the corresponding lease obligation. During the term of the lease, lessee charges depreciation expenses and interest expenses. Criteria for lease capitalization A lease is considered a capital lease if ANY of the following conditions apply: y Essential transfer of ownership at the end of lease term - No payment for leased asset, or Bargain purchase option (BPT) (Payment below market value after the lease term) y Minimum present value of lease payments (including BPO, if any) at least 90% of asset's market value y Lease term is 75% of asset's remaining useful life - Bargain renewal option (BRO) - renewal of the lease for a rental below the expected fair market rental value, essentially extending the life of a lease Long-Term Liabilities: Leases & Bonds LEASES - BALANCE SHEET EQUATION If lease is an Operating Lease At the inception of the lease, any payment in advance is recorded as prepaid rent. When the lease terminates, prepaid rent = 0. Assets Liabilities S. E. Type of transaction Cash Prepaid Rent R. E. Payment in advance (cash paid) cash paid (if any) During Lease (rent payment) (rent payment) OR Pay when due (rent payment) (rent payment) Long-Term Liabilities: Leases & Bonds If lease is a Capital Lease • Accounting is similar to acquiring an asset with a 100% debt financing. • Any payment in advance is recorded as an immediate reduction in the lease liability. • During the lease, interest (based on the market rate at lease inception) and depreciation expense are recognized. • When the lease terminates, the lease obligation is zero and Leased Property - Acc. Depr. = 0 Assets Liabilities S. E. Date Cash Leased -Acc. Lease Retained Property Depr. Obligation Earnings a Lease inception Market Value Market Value Payment in (amt paid) (amt paid) advance (if any) Each lease (lease payment) (reduction)c (Interest Exp.)b period Depr Exp (Depr. Exp.) • a Present Value of the Lease Payments (PV of an annuity due) • b Interest Expense = Interest Rate x Beginning Balance of Lease Obligation • c Reduction = Lease Payment - Interest Expense (Plug value)