Lease classification Consider the following scenarios: (a) Entity A leases a motor vehicle from Entity B for a non-cancellable three-year period. At the inception of the lease, the lease was assessed as an operating lease. The lease did not contain any explicit option in the lease contract to extend the term of the lease. After 2 years, Entity A applies to Entity B to extend […]

Leases of land and buildings Consider the following scenarios: Company A leases a building (and the underlying land) for 10 years. The remaining economic life of the building when the lease is entered into is 30 years. The lease is for considerably less than the economic life of the building so it is clear that both the land and buildings elements are operating leases and […]

Calculation of the implicit interest rate and present value of minimum lease payments Details of a non-cancellable lease are as follows: (i) Fair value = €10,000 (ii) Five annual rentals payable in advance of €2,100 (iii) Lessor’s unguaranteed estimated residual value at end of five years = €1,000 The implicit interest rate in the lease is that which gives a present value of €10,000 for […]

The lessor’s gross and net investment in the lease The lease has the same facts as described in, i.e. the asset has a fair value of €10,000, the lessee is making five annual rentals payable in advance of €2,100 and the total unguaranteed estimated residual value at the end of five years is estimated to be €1,000. The lessor’s direct costs have been excluded for […]

A lease structured such that the most likely outcome is that the lessee has no significant residual risk Brief details of a motor vehicle lease are: Fair value – €10,000 Rentals – 20 monthly payments @ €300, followed by a final rental of €2,000 At the end of the lease, the lessee sells vehicle as agent for the lessor and if sold for: (i) more […]

Rental rebates The lease arrangements are as in, except that at end of the lease, the lessee sells the vehicle as agent for the lessor, and if it is sold for (i) up to £3,000, the guaranteed residual value, all of the proceeds are received by the lessor; or (ii) more than £3,000, 99% of excess is repaid to the lessee. The lessee does not […]

Early termination of finance leases by lessees In in above there is effectively a guarantee of a residual of €3,000 dependent on the mileage done by the leased vehicle. Assuming that the lease is capitalised as a finance lease, if the lessee considers at the lease inception that the guarantee will not be called on, then he will depreciate the vehicle to an estimated residual […]

An entity agrees to enter into a new lease arrangement with a new lessor. As an incentive for entering into the new lease, the lessor agrees to pay the lessee’s relocation costs. The lessee’s moving costs are €1,000. The new lease has a term of 10 years, at a fixed rate of €2,000 per year. The lessee recognises relocation costs of €1,000 as an expense […]

Sale and finance leaseback – accounting for the excess sale proceeds An asset that has a carrying value of €700 and a remaining useful life of 7 years is sold for €1,200 and leased back on a finance lease. This is accounted for as a disposal of the original asset and the acquisition of an asset under a finance lease for €1,200. The excess of […]

Tran Corporation is authorized to issue both preferred and common stock. The par value of the preferred is $50. During the first year of operations, the company had the following events and transactions pertaining to its preferred stock. Feb. 1 Issued 20,000 shares for cash at $53 per share. July 1 Issued 12,000 shares for cash at $57 per share. Instructions (a)Journalize the transactions. (b)Post […]