...Magnet Beauty leases all of its stores from the same lessor. They have determined that leasing makes more sense than buying properties. Describe the process that most companies undertake to make lease-versus-buy decisions. A company attempting to differentiate and decide between lease-versus-buy should first consider how long it plans to have the facility. This is an important point/factor when deciding between the two options because a company may opt to lease a facility, for instance, for a short time if the company is aware that it will move to a new location in the near future whereas a company will be more likely to purchase if the company knows that it will continue business in that location in the future. Another important factor is whether or not the company wishes to own the asset or simply use it for a certain period of time without being responsible for upkeep of the asset. We will see later that there is a distinction between capital and operating leases that touches on this concept. However, with purchasing of the asset there is no option of full ownership; as soon as you buy it you own. A company will also reflect on the concept of tax. If the asset is worth a lot of money then acquisition of this asset will have ramifications on taxable income. If you purchase the asset for instance then there will be less cash in the business therefore less taxable income at the end of the year whereas on the other hand if the asset is leased on an operating lease basis then the...
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...have researched the FASB website for information on leases and lease structure issues, in particular the current practices and thought related to direct financing, sales type, and operating leases. The following is a brief explanation of the results and also a recommendation of an approach that the client can use to evaluate and capitalize on the opportunity of adding the new customer. The FASB has outlined certain criteria for classifying leases as either capital leases or operating leases. In SFAS No. 13 the criteria for classifying a lease as a capital lease are; the lease transfers ownership, the lease contains a bargain purchase option, the lease term is equal to 75 percent or more of the estimated remaining economic life, and at the beginning of the lease term the present value of the minimum lease payments equals or exceeds 90 percent of the fair value of the leased property less any related investment tax credit retained by the lessor (Schroeder, Clark, & Cathey, 2011). The lease only has to meet one of those criteria to be a capital lease. If none of these criteria are met then the lease is classified as an operating lease. Leases can also be classified as a sales type lease or a direct financing lease. For a lease to be classified as a sales type or direct financing lease the lease would have to meet one of the criteria listed above plus two other criteria. The other two criteria are; collectability of the minimum lease payments is reasonably predictable and no important...
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...non-cancelable agreement with Goliath Company to lease a turbine. The lease is effective on January 1, 2011. The purpose of this report is to provide Big Bear with insight in evaluating whether the costs or potential costs associated with the lease should be included in the “minimum lease payments” according to US GAAP Accounting Standards Codification. When assessing the minimum lease payments, we reviewed the legal costs incurred to Big Bear’s external legal counsel (Stripe, Berry, Mills, and Buck LLP) pertaining to the negotiation of the lease terms. We also examined the provision requiring Big Bear to pay a penalty if it were to default under its current credit arrangement with its bank, as well as the effect on monthly payments that are subject to an increase in the consumer price index calculation. Provision One First we will review the costs incurred during the negotiating of the lease terms. Big Bear is required to pay its external legal counsel $500,000 in legal costs. This amount should not be included in its minimum monthly payments because per accounting guidance ASC 840-10-25-5: For a lessee, minimum lease payments comprise the payments that the lessee is obligated to make or can be required to make in connection with the leased property, excluding both of the following: a) Contingent rentals b) Any guarantee by the lessee of the lessor's debt and the lessee's obligation to pay (apart from the rental payments) executory costs such as insurance, maintenance...
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...Capital Leases | Overview According to FASB ASC 840 (n.d.) (IAS 17), a capital lease exists if one of four conditions is met: the transfer of title of the asset to the lessee, the lease includes a bargain purchase option, the lease period is equal to or greater than 75% of the estimated economic life of the asset, or the present value of the minimum lease payments is 90% or more of the fair value of the asset less investment tax credit held by the lessor. Capital Leases | Requirements of the Lessee The lessee should report the asset and liability on the balance sheet or in footnotes at the present value of the minimum lease payments at the beginning of the lease unless the fair value of the leased asset at lease inception is lower (FASB ASC 840, n.d.). Disclosure requirements in the balance sheet or footnotes include the gross amount of assets recorded under capital leases, future minimum lease payments, and total of minimum sublease rentals (FASB ASC 840, n.d.). The income statement presentation must include the total contingent rentals (FASB ASC 840, n.d.). Capital Leases | Requirements of the Lessor Lease agreements, in general, require systematic payments from the lessee to the lessor. Depending on the recognition of the lessor’s income, historically in relation to lease agreements, the lessor had an option to either follow the accounting matching principle and pair lease payments with the applicable operating cost in any given period or chose...
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...Company on January 1, 2013, enters into a five-year noncancelable lease, with four renewal options of one year each, for equipment having an estimated useful life of 10 years and a fair value to the lessor, Daly Corp., at the inception of the lease of $3,000,000. Krause's incremental borrowing rate is 8%. Krause uses the straight-line method to depreciate its assets. The lease contains the following provisions: 1. Rental payments of $219,000 including $19,000 for property taxes, payable at the beginning of each six-month period. 2. A termination penalty assuring renewal of the lease for a period of four years after expiration of the initial lease term. 3. An option allowing the lessor to extend the lease one year beyond the last renewal exercised by the lessee. 4. A guarantee by Krause Company that Daly Corp. will realize $100,000 from selling the asset at the expiration of the lease. However, the actual residual value is expected to be $60,000. Instructions (a) What kind of lease is this to Krause Company? (b) What should be considered the lease term? (c) What are the minimum lease payments? (d) What is the present value of the minimum lease payments? (PV factor for annuity due of 20 semi-annual payments at 8% annual rate, 14.13394; PV factor for amount due in 20 interest periods at 8% annual rate, .45639.) (Round to nearest dollar.) (e) What journal entries would Krause record during the first year of the lease? (Include an amortization schedule through 1/1/14 and round...
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...ATC Profile. American Tower Corporation is a holding company. The Company conducts its operations through its directly and indirectly owned subsidiaries and joint ventures. It is a wireless and broadcast communications infrastructure company that owns, operates and develops communications sites. Its primary business includes leasing antenna space on multi-tenant communications sites to wireless service providers, radio and television broadcast companies, wireless data providers, government agencies and municipalities and tenants in a number of other industries. This business is its rental and management operations, which accounted for approximately 98% of its total revenues during the year ended December 31, 2011 It also offer tower-related services domestically, including site acquisition, zoning and permitting services and structural analysis services, which primarily support its site leasing business and the addition of new tenants and equipment on its sites. In January 2012, the Company merged with and into American Tower REIT, Inc. During 2011, the Company acquired additional 125 communications sites from Telefonica Colombia. On February 1, 2011, the Company acquired 140 communications sites from VTR Banda Ancha (Chile) S.A. and its affiliates. On December 30, 2011, the Company purchased 100% interest of a subsidiary of Telefonica Moviles Chile S.A. that owned 558 communications sites. On December 14, 2011, the Company acquired control of an additional 76 existing...
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... 2011 Subject: FASB Lease Practices and Client Recommendation I have researched and analyzed the different Financial Accounting Standards Board (FASB) practices related to lease options, which our trucking client may want to consider in his or her new business opportunity. Leases are a way in which companies can finance a business project. According to the official FASB website, a lessor may record a lease transaction as a sales type lease, a direct financing lease, or an operating lease. A sales type lease and a direct financing lease are different ways to record a capital lease (Standards, 1976). One lease option the trucking client has is to record the leases as direct financing leases. Direct financing leases are recorded when the carrying value of the lease is equal to the fair value of the leased property at inception (Standards, 1976). This lease arrangement is a sales and financing transaction. When a direct financing lease is recorded, only the interest received is recognized on the lessors books as income. The cash outflow is equal to the carrying value of the asset, and the cash inflow is equal to the lease payments (CFA, 2011). Another lease option the trucking client has is to record the leases as sales type leases. A sales type lease is similar to a direct financing lease, except upon inception of the lease; profit on a sale is recognized. The profit recorded at the beginning of the lease term is the present value of the lease payments, less the cost...
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...Income Taxes We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the respective tax bases of our assets and liabilities. Deferred tax assets and liabilities are measured using current enacted tax rates expected to apply to taxable income in the years in which we expect the temporary differences to reverse. We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available evidence, we determine that some portion of the tax benefit will not be realized. In addition, our income tax returns are periodically audited by domestic and foreign tax authorities. These audits include questions regarding our tax filing positions, including the timing and amount of deductions taken and the allocation of income among various tax jurisdictions. We evaluate our exposures associated with our various tax filing positions; we recognize a tax benefit only if it is more likely than not that the tax position will be sustained on examination by the relevant taxing authorities, based on the technical merits of our position. For uncertain tax positions that do not meet this threshold, we record a related liability. We adjust our unrecognized tax benefits liability and income tax expense in the period in which the uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the...
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... ACCOUNTING FOR LEASES FASB 13 (as amended) Synopsis: A lease that transfers substantially all of the benefits and risks of ownership should be accounted for as the acquisition of an asset and the incurrence of an obligation by the lessee and as a sale or financing by the lessor. The chart below includes the BASIC criteria you must learn to classify leases. We will also do more complicated examples that will require FARS research. U.S. GAAP CRITERIA FOR CAPITALIZATION: FOR LESSEE AND LESSOR: (must meet at least one) A1 - TITLE TRANSFERS. The lease transfers ownership of the property to the lessee by the end of the lease term. A2 - BARGAIN PURCHASE OPTION. The lease contains an option to purchase the leased property at a bargain price. A3 – ECONOMIC LIFE. The lease term is equal to or greater than 75% of the estimated economic life of the leased property. A4 – RECOVERY OF INVESTMENT. The present value of the minimum lease payments equals or exceeds 90% of the fair value of the leased property less any investment tax credit retained by the lessor. FOR LESSOR ONLY: (must meet both) B1 - COLLECTIBILITY. Collectibility of the minimum lease payments is reasonably predictable. B2 - NO UNCERTAINTIES. No important uncertainties surround the amount of unreimburseable costs yet to be incurred by the lessor under the lease. We will work through a variety of examples. In some cases, we will classify the lease and do journal entries...
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...Empty Eye Inc. 44422 Highway 290 Business, Ste.12 P.O. Box 126 Prairie View, Texas 77446 Property Manager:(832) 282-9327 (C) Leasing Office: (936) 857-9500 (O) Rental Application Form Full Name: ______________________________________ Home Address: __________________________________ Drivers License#: _________________________________ Or Govt. ID#: ____________________________________ Address on ID: ___________________________________ Vehicle Plate#: ___________________________________ Lease Term-From: _______________ Lease Term-To: _________________ College Attending ________________ _______________________________ _______________________________ _______________________________ Social Security#: __________________________________ Birthday: _________________________________________ Height & Weight: __________________________________ Sex, Eyes/Hair Color: M__ F__ Eye ________ Hair _______ Marital Status: ____________________________________ Are You a Citizen: Y__ N__ Other _____________________ Do You Have a Cosigner: __________ Cosigner’s Name: ________________ Cosigner’s Cell#: ________________ Do You Have a Roommate: ________ Roommate’s Name: ______________ Roommate’s Cell#: ______________ Cell Phone#: _____________________________________ Home Phone#: ___________________________________ Email Address: ___________________________________ Requesting A Roommate: Y___ N___ RM Gender: ____________________ RM Approx. Age: ________________ ...
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...research results | | | As you requested, I have completed the research on the lease types and lease structure issues on the Financial Accounting Standards Board (FASB) website for the Lone Star Trucking Company. I did specific research on direct financing, sales type, and operating leases. After going over the information I have, I will provide you my recommendation for handling the client’s situation According to the FASB, both the client and the client’s potential new customer need to determine if their arrangement will meet one or more of these four criteria: 1. Transfer of ownership – the potential lease will transfer ownership of the property to the lessee at the end of the designated lease term (fasb.org). The client will have met this criterion if the lease agreement provides for the transfer of title at or shortly after the end of the lease term. Usually, there is a nominal fee that is required by statutory regulation to transfer title. 2. Bargain purchase option – the potential lease will contain a bargain purchase option, where the lessee will have the option to purchase the asset for a percentage less than the fair market value (fasb.org). 3. Lease term - the potential lease term is equal to 75 percent or more of the estimated economic life of the lease property (fasb.org). 4. Minimum lease payments - the present value at the beginning of the lease term of the minimum lease payments, excluding any portion of the payments representing miscellaneous costs...
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...Benefits of a Capital Lease December 3, 2012 MEMORANDUM TO: Trucking Company, Inc. FROM: Accountant DATE: December 3rd, 2012 SUBJECT: Benefits of a Capital Lease CC: John Smith, Supervisor In response to your request for more information on the topic of leases, I will explain the different aspects of leases to help you get a better understanding of the topic so that you may make an informed decision on which type of lease is best for your company. Capital Leases A capital lease emulates an installment purchase of an asset. This type of lease transfers the benefits and risks associated with ownership of an asset to the lessee (Schroeder, Clark, & Cathey, 2011). According to ASC 840-10-25 (FASB, 2009) (IAS 17), a lease must meet at least one of the following four criteria to be considered a capital lease: a. Ownership is transferred by the end of the lease agreement. b. There is a chance to purchase at a bargain price. c. The length of the lease is 75% or more of the assets life. d. The sum of the minimum payments, calculated at present value, exceed 90% of the assets fair value. Criteria c and d do not apply if the term of the lease begins in the final 25% of the assets useful life. Two Types of Capital Leases There are two types of capital leases concerning the lessor; direct financing and sales-type leases. For a capital lease to be considered a direct financing or sales-type lease, according to ASC 840-10-25 (FASB, 2009), both of the following...
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...09-4 Needs Space: Accounting for Lease Agreements Background NeedsSpace have entered into a leasing agreement with WeHaveIt to rent space for its corporate offices. Certain provisions have been included within the lease that Needs Space must take into consideration. ASC 840 has defined this lease as an operating lease. Key Facts The lease agreed upon is a 10-year term lease with no option to renew. Furthermore, there is no ability to negotiate for renewal. The following provisions are included in the lease agreement: • “Lessor may require the lessee to perform general repairs and maintenance on the leased premises.” • “Lessor may require the lessee to remove all leasehold improvements such that the premise is reinstated to original condition.” Consequentially, NeedsSpace has placed into service improvements with useful lives of 10 years. These improvements include temporary walls, HVAC system, and carpeting, among others. This lease agreement falls under the ASC 840 rules and subsections and will be referenced as the solution is analyzed. Relevant Issue The case has us utilize accounting literature and financial authority to research the accounting methodology for the two obligations presented in the leasing agreement. Given the economic effect the obligations may have on the counterparty, it is essential to account for these correctly and efficiently. Each obligation presents a unique obligation to the counterparty. These obligations will be examined throughout the...
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...CHAPTER 21 For a capital lease, the FASB has identified four criteria. 1. Lease transfers ownership of the property to the lessee. 2. Lease contains a bargain-purchase option. 3. Lease term is equal to 75 percent or more of the estimated economic life of the leased property. 4. The present value of the minimum lease payments (excluding executory costs) equals or exceeds 90 percent of the fair value of the leased property. **** Leases that DO NOT meet any of the four criteria are accounted for as Operating Leases. Capitalization Criteria Transfer of Ownership Test Not controversial and easily implemented. Bargain-Purchase Option Test At the inception of the lease, the difference between the option price and the expected fair market value must be large enough to make exercise of the option reasonably assured. Economic Life Test (75% Test) Lease term is generally considered to be the fixed, noncancelable term of the lease. Bargain-renewal option can extend this period. At the inception of the lease, the difference between the renewal rental and the expected fair rental must be great enough to make exercise of the option to renew reasonably assured. Recovery of Investment Test (90% Test) Minimum Lease Payments: Minimum rental payment Guaranteed residual value Penalty for failure to renew or extend the lease Bargain-purchase option Executory Costs: Insurance Maintenance Taxes Exclude from PV of Minimum Lease Payment Calculation Sales-Type...
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...If the lease contains a bargain purchase option, only the minimum rental payments over the lease term and the payment called for by the bargain purchase option shall be included in the minimum lease payments. Otherwise, minimum lease payments include all of the following: a. The minimum rental payments called for by the lease over the lease term. b. Any guarantee by the lessee (including by a third party related to the lessee) of the residual value at the expiration of the lease term, whether or not payment of the guarantee constitutes a purchase of the leased property. If the lessor has the right to require the lessee to purchase the property at termination of the lease for a certain or determinable amount, that amount shall be considered a lessee guarantee of the residual value. If the lessee agrees to make up any deficiency below a stated amount in the lessor's realization of the residual value, the residual value guarantee to be included in the minimum lease payments shall be the stated amount, rather than an estimate of the deficiency to be made up. c. Any payment that the lessee must make or can be required to make upon failure to renew or extend the lease at the expiration of the lease term, whether or not the payment would constitute a purchase of the leased property. Note that the definition of lease term includes all periods, if any, for which failure to renew the lease imposes a penalty on the lessee in an amount such that renewal appears, at lease inception...
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