What is an ROU (Right of Use) Asset?
Lessee has the Right of Use for the underlying
asset throughout the term of the lease.
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What are the four criteria for a Finance Lease (POETS)?
A Lease is a Finance Lease if it meets ANY of the following (POETS):
- Present Value: Present Value equals or exceeds Fair Value
- Option to Purchase: Exercise is reasonably certain
- Economic Life: Lease term is major part of Economic Life
- Transfer of Ownership
- Specialized Nature: No alternative use to Lessor at end of Lease
What are the criteria for an Operating Lease?
None of the Criteria for a Finance Lease (POETS) satisfied and the Lease Term is longer than 12 months*.
*If less than 12 months, it’s a Short-Term Lease and gets no Balance Sheet recognition.
What is a Short-Term Lease and what are the advantages?
Advantage: Avoids Balance Sheet recognition
Requirements:
- Lease Term is 12 months or Less
- Exemption disallowed if Purchase Option exercise is reasonably certain
Recognition:
- No Asset & Liability Recorded
- Lease Payments on Straight Lines
What is the Journal Entry for Lease Payments for Short-Term Lease?
Dr. Rent Expense
- Cr. Cash or Lease Payable
What are the Journal Entries for a Finance Lease?
Journal Entry – ROU Asset Initial Finance Lease
Dr. ROU Asset
- Cr. Cash
- Cr. Lease Liability
Journal Entry – Lease Payments
Dr. Interest Expense
Dr. Lease Liability
- Cr. Cash
Journal Entry – ROU Asset Amortization
Dr. ROU Asset Amortization
- Cr. ROU Asset
What are the Journal Entries for an Operating Lease?
Journal Entry – Initial Operating Lease
Dr. ROU Asset
- Cr. Lease Liability
Journal Entry – Lease Payments
Dr. Lease Liability
- Cr. Cash
Journal Entry – ROU Asset Amortization
Dr. Lease Expense
- Cr. ROU Asset
What are the Journal Entries for a Sales-Type Lease (Lessor)?
Journal Entry – Lease Commencement
Dr. Net Investment in Lease
- Cr. Asset (CV)
- Cr. Selling Profit
Dr. Initial Direct Cost
- Cr. Cash
Journal Entry – Receipt
Dr. Cash
- Cr. Interest Income
- Cr. Net Investment in Lease
Journal Entry – Lease Termination
Dr. Asset
- Cr. Net Investment in Lease
What are the Journal Entries for a Direct Financing Lease (Lessor)?
Journal Entry – Lease Commencement
Dr. Net Investment in Lease
- Cr. Asset (CV)
- Cr. Cash (Initial Direct Cost)
Journal Entry – Receipt
Dr. Cash
- Cr. Interest Income
- Cr. Net Investment in Lease
Journal Entry – Lease Termination
Dr. Asset
- Cr. Net Investment in Lease
What are the Journal Entries for an Operating Lease (Lessor)?
Journal Entry – Lease Commencement
Dr. Initial Direct Cost
- Cr. Cash
Journal Entry – Receipt
Dr. Cash
Dr. Accrued Rent Receivable
- Cr. Lease Revenue
