Chapter 21: Accounting for Leases

(Comparison of Different Types of Accounting by Lessee and Lessor)

Part 2: Sales-type leases and direct-financing leases are two of the classifications of leases described in FASB pronouncements from the standpoint of the lessor.

Instructions

Compare and contrast a sales-type lease with a direct-financing lease as follows.

Do not discuss the criteria for distinguishing between the leases described above and operating leases.

(Comparison of Different Types of Accounting by Lessee and Lessor)

Part 2: Sales-type leases and direct-financing leases are two of the classifications of leases described in FASB pronouncements from the standpoint of the lessor.

Instructions

Compare and contrast a sales-type lease with a direct-financing lease as follows.

(b) Recognition of interest revenue.

Do not discuss the criteria for distinguishing between the leases described above and operating leases.

(Comparison of Different Types of Accounting by Lessee and Lessor)

Part 2: Sales-type leases and direct-financing leases are two of the classifications of leases described in FASB pronouncements from the standpoint of the lessor.

Instructions

Compare and contrast a sales-type lease with a direct-financing lease as follows.

(c) Manufacturer’s or dealer’s profit.

Do not discuss the criteria for distinguishing between the leases described above and operating leases.

Outline the accounting procedures involved in applying the operating lease method by a lessee.

Question: Which of the following statements is true when comparing the accounting for leasing transactions under GAAP with IFRS?

1. IFRS for leases is more “rules-based” than GAAP and includes many bright-line criteria to determine ownership.
2. IFRS requires that companies provide a year-by-year breakout of future non-cancelable lease payments due in years 1 through 5.
3. The IFRS leasing standard is the subject of over 30 interpretations since its issuance in 1982.
4. IFRS does not provide detailed guidance for leases of natural resources, sale-leasebacks, and leveraged leases.

Ballard Company rents a warehouse on a month-to month basis for the storage of its excess inventory. The company periodically must rent space whenever its production greatly exceeds actual sales. For several years, the company officials have discussed building their own storage facility, but this enthusiasm wavers when sales increase sufficiently to absorb the excess inventory. What is the nature of this type of lease arrangement, and what accounting treatment should be accorded it?

Question: All of the following statements about lease accounting under IFRS and GAAP are true except:

1. IFRS requires a year-by-year breakout of payments related to leasing arrangements.
2. IFRS is more general in its lease accounting provisions than is GAAP.
3. The IFRS leasing standard, IAS 17, is the subject of only three interpretations.
4. Finance leases under IFRS are capital leases under GAAP.

(Lessee Capitalization of Bargain-Purchase Option) Albertsen Corporation is considering proposals for either leasing or purchasing aircraft. The proposed lease agreement involves a twin-engine turboprop Viking that has a fair value of $1,000,000.Thisplanewouldbeleasedforaperiodof10yearsbeginningJanuary1,2017.Theleaseagreementiscancelableonlyuponaccidentaldestructionoftheplane.Anannualleasepaymentof$141,780 is due on January 1 of each year; the first payment is to be made on January 1, 2017. Maintenance operations are strictly scheduled by the lessor, and Albertsen Corporation will pay for these services as they are performed. Estimated annual maintenance costs are $6,900.Thelessorwillpayallinsurancepremiumsandlocalpropertytaxes,whichamounttoacombinedtotalof$4,000 annually and are included in the annual lease payment of $141,780.Uponexpirationofthe10-yearlease,AlbertsenCorporationcanpurchasetheVikingfor$44,440. The estimated useful life of the plane is 15 years, and its salvage value in the used plane market is estimated to be $100,000after10years.Thesalvagevalueprobablywillneverbelessthan$75,000 if the engines are overhauled and maintained as prescribed by the manufacturer. If the purchase option is not exercised, possession of the plane will revert to the lessor, and there is no provision for renewing the lease agreement beyond its termination on December 31, 2026.

Albertsen Corporation can borrow $1,000,000undera10-yeartermloanagreementatanannualinterestrateof12$137,780 per year and the initial fair value of $1,000,000fortheplane.OnJanuary1,2017,thepresentvalueofallnetrentalpaymentsandthepurchaseoptionof$44,440 is $888,890usingthe12$44,440 purchase option on January 1, 2017, is \(1,022,226 using the 8% interest rate implicit in the lease agreement. The financial vice president of Albertsen Corporation has established that this lease agreement is a capital lease as defined in GAAP.

Instructions

(b) Without prejudice to your answer in part (a), assume that the annual lease payment is \)141,780 as stated in the question, that the appropriate capitalized amount for the leased aircraft is $1,000,000 on January 1, 2017, and that the interest rate is 9%. How will the lease be reported in the December 31, 2017, balance sheet and related income statement? (Ignore any income tax implications.)

Distinguish between minimum rental payments and minimum lease payments, and indicate what is included in minimum lease payments.

(Lease Capitalization, Bargain-Purchase Option) Baden Corporation entered into a lease agreement for 10 photocopy machines for its corporate headquarters. The lease agreement qualifies as an operating lease in all terms except there is a bargain-purchase option. After the 5-year lease term, the corporation can purchase each copier for $1,000,whentheanticipatedfairvalueis$2,500.

Jerry Suffolk, the financial vice president, thinks the financial statements must recognize the lease agreement as a capital lease because of the bargain-purchase option. The controller, Diane Buchanan, disagrees: “Although I don’t know much about the copiers themselves, there is a way to avoid recording the lease liability.” She argues that the corporation might claim that copier technology advances rapidly and that by the end of the lease term the machines will most likely not be worth the $1,000 bargain price.

Instructions

Answer the following questions.