
This course provides a basic understanding of the new lease accounting rules pursuant to Accounting Standards Codification (ASC) Topic 842, Leases, issued in February 2016. ASC 842 makes substantial changes to the accounting for leases, primarily for the Lessee.
A lease conveys the right to the Lessee to control the use of the identified property, plant, or equipment for a period of time in exchange for consideration to the Lessor. For the Lessee, leases are either Finance leases or Operating leases. The Lessee will record a right of use asset and lease liability for all leases with a term greater than one year. A Finance lease must meet one of five requirements, four of which are similar to prior capital lease accounting. If a lease is not a Finance lease, it’s an Operating lease. Most leases of equipment will be Finance leases and space leases will be Operating leases. For the Lessor, a lease is either an Operating lease, Direct Financing lease or Sales-Type lease. In general, the accounting for the Lessor has not changed substantially from the prior rules.
Accounting for leases from both the Lessee's and Lessor's perspective will be analyzed as well as lease straight lining, advantages and disadvantages of leasing, financial statement disclosure and the financial impact of the new rules.
Learning Objectives
- Discover the new accounting rules pursuant to Accounting Standards Codification (ASC) Topic 842, Leases.
- Explore the accounting for Finance and Operating leases for Lessees.
- Explore the accounting for Operating, Direct Financing, and Sales-Type leases for Lessors.
- Discover how to calculate right of use asset, lease liability, interest expense, and amortization of the leased asset.
- Discover specific examples of lease accounting for both Lessee and Lessor.
- Discover the concept of straight lining of leases.
- Recognize the advantages and disadvantages of leasing.
- Identify the new financial statement disclosures for leases.
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Prerequisites
Prerequisite: Basic proficiency in US GAAP accounting
Advanced Preparation: None
I don't think the answer to question number 4 on the exam is correct. Lessor's entry for operating lease should be just dr cash/cr rental income, right???
You are correct and that is the answer choice D, debit cash and credit rent revenue.
What is the calculation for #5 question?
Since the rent payments are made at the beginning of the year, its an annuity due. The NPV is 6 payments of $20,000 discounted at10% or $87,105 plus the first payment of $20,000 or $107,105. In the real world space leases are paid monthly in advance but on a yearly basis would be an ordinary annuity and the ROU asset would be $97,368 (7 payments of $20,000 discounted at 10%).
If the lease terms are stated for monthly payments, how would the time value calculations would go?
Most time value of money calculations are done on an annual basis, therefore, just add up the monthly amounts over the year period and then calculate the present value or other amounts.