A Capital Lease

The third and final question from the case is how would the lease classification change under U.S. GAAP. The FASB codification that deals with leases is ASC 840. U.S. GAAP classifies leases as operating leases or capital leases and it has a section for sale-leaseback transactions as well. Under U.S. GAAP, the lease in this case would be classified as a capital lease. This is because ASC 840-10-25-29 says, “If at its inception a lease meets any of the four lease classification criteria in paragraph 840-10-25-1, the lease shall be classified by the lessee as a capital lease.” This lease meets two of those criterions. The lease term is equal to 75% of the economic life of the equipment (3 year lease term / 4 year economic life of equipment = .75 or 75%) and the present value of the minimum lease payments “equals or exceeds 90 percent of the excess of the fair value of the lease property to the lessor at lease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor” (ASC 840-10-25-1d). The present value of the minimum lease payments does in fact equal or exceed 90 percent of the fair value of the equipment ($248,690 / $265,000 = .94 or 94%). Under ASC 840-10-25-31, the lessee should use the implicit rate to calculate the present value of the lease payments because the lessee already

C. In a sales-type lease the carrying value of the asset is charged to cost of the asset leased (expense), and the present value of the minimum lease payment as the amount of the sale. For direct financing leases no sales or expense is recognized because the asset is removed from the books. The difference between its carrying value and the undiscounted minimum lease payments is recorded as unearned interest revenue. The net investment in a sales type lease ia accounted for in a similar manner as a direct financing

A landlord and a real estate broker enter into a Florida Exclusive Right to Lease Agreement during the lease of a residential property in Florida State. This agreement offers exclusive rights to the broker to find a tenant within the agreement tenure of no more than 12 months. In addition, 22 sections of the agreement have terms and conditions of the Finders Fee Only Non - Management Agreement. Both the landlord and agent must prepare this agreement together in its entirety as it is legally binding on both as per the Florida Statute. In addition, the landlord must provide information about the requested inputs in the General Information annexure. The landlord must read section R to understand the tax

Then thirdly, the operating lease is when the lessor depreciates the leased asset according to its depreciation policy. The maintenance costs of the leased asset are charged as an expense, the costs, such as finder’s fees and credit checks, are amortized over the lease term, and the leased equipment and accumulated depreciation are shown as equipment leased to others. Usually any lease that do not fall under the criteria for a direct financing lease or sales-type lease are recorded as an operating lease.

ASC 840-10-25-1 presents the criteria the Lessee will consider as part of classifying the lease. Each criterion will be analyzed separately to determine if it meets the classification as a capital lease. ASC 840-10-25-1a states:

Upon researching the legal requirements and current status of Mr. William Massey’s lease agreement with YourTeamNameHere!.com, Inc. (YTNH) when Mr. Kelly Bennett acted on behalf of YTNH, as an authorized agent, in the acquisition of the property located at 1831 Storybook Road, Charlotte, North Carolina. The assessment of the contract’s validity will be completed through the following enumerated points: (1) whether the lease is required to be in writing, (2) what must the lease contain to be valid, and (3) whether the parties existing writings satisfy the legal requirements of North Carolina.

From the above classification we can see that all the points indicate that the leases undertaken by David Jones Ltd as a Lessee are Operating Leases or Finance leases and can be determined using the steps above. Being such a big company, David Jones Ltd has both Operating and Financial leases and they are taken mainly to run the firm’s stores and warehouses. Under the annual report for the half year ended 2013 it is clearly evident that the cost of leasing activities for David Jones Ltd has increased by 4.17mn. “Payments made under operating leases, where the lease agreement includes predetermined fixed rate increases, are recognised in the Statement of Comprehensive Income on a straight-line basis over the term of the lease. Other operating lease payments are expensed as incurred. Lease incentives received are recognised in the Statement of Comprehensive Income as an integral part of the total lease expense and spread over the lease term.”

How should NeedsSpace account for the two obligations noted as provisions in the lease agreement?

the original term of the lease is equal to or greater than the remaining economic life of the goods;

While working on a consulting engagement, a supervisor in the team has given an assignment. The client is a regional trucking company. A new customer has approached the client with an opportunity that would require 120 trailers—20 more than the trucking company currently owns. The client is uncertain how long the relationship with the customer may last, but the deal has the potential for significant growth. The supervisor has asked a research to be conducted on leases and lease structure issues on the Financial Accounting Standards Board (FASB) website, in particular the current practice and thought related to direct financing, sales type, and operating leases. This paper is a memo addressed to the supervisor that summarizes

5. measure the right-of-use asset at the amount of the liability to make lease payments, plus any initial direct costs incurred by the lessee

A sales-type lease is defined in ASC 840-10-25-43(a) and states, “A lease is a sales-type lease if it gives rise to manufacturer’s or dealer’s profit (or loss) to the lessor (that is, the fair value of the leased property at lease inception is greater or less than its cost or carrying amount, if different) and meets either of the following conditions,” and the conditions it must meet are the conditions for a capital lease and the payments must be reasonably predictable and no important uncertainties about the payments should be present as stated in ASC 840-10-25-42. The conditions for classifying a capital lease are described in ASC 840-10-25-1. The journal entries would differ from the others as it would include sales revenue in the initial recording.

Lease financing is a contractual relationship formed between a lessor, lessee and a supplier. The lessor buys goods from the supplier and rents the goods to a lessee who is given the right to possession of the good for a specified amount of time. This turns into a financing situation, since the lessee owes a debt to the lessor for purchasing the goods on behalf of the lessee . The lessor will usually benefit from an interest rate percentage that is collected from the lessee in exchange for financing the goods. Article 2A of the U.C.C is dedicated completely towards the true leasing of goods (Clarkson, 2015, p.383). Although the rules governing the leasing of goods is similar to the sale of goods covered in Article 2, Article 2A specific contract rules pertaining to leasing relationships. Under Aricle 2A-407, the lessee’s obligations to the finance contract are irrevocable and separate from the obligations of the financer. The lessee is obligated to make payments regardless if the equipment’s ends up defective and must refer to the supplier for relief of the defective product(Clarkson, 2015, p.). For example, a Bank purchases equipment and leases it to ABC Corp. The equipment later turns out to be defective and ABC Corp. stops making lease payments. The bank will be able to sue ABC Corp. because under Article 2A, payments are due regardless of the equipment condition.

Under IFRS, lease classification depends on whether substantially all of the risks and rewards incidental to ownership of a

With a discount rate of 4.4%, the present values of the rental payments for the years 2006 and 2007 are as follows: