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UI ACCT 414 - Lease

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LeasesBPO - Lease 1EBargain Purchase OptionSlide 4Slide 5Example 1FSlide 9Example 1fSlide 11A quick comparisonIFRS uses “indicators” that are considered as a wholeIndications that a contract is a FINANCE lease (continued)Terminology DifferencesExample 2What to use for “i”Example 2aOn January 1, 2012, Powell Trucking and Cummingham Diesel sign a lease with the following terms:Slide 20Slide 21Slide 22ComplicationsInitial Direct CostsResidual Value and MLPOn 1/1/12, Micronomics Inc. and Ozark Oscillators entered into a lease with the following terms:Two different tables needed!On October 1, 2012, Seiler Systems and Computer Leasing of America sign a lease with the following terms:Example 7 - LessorMore complications . .Determining the Lease TermExcluded from MLPOn June 1, 2012, Fantasia Funnels, Inc. and Idaho First Bank sign a lease with the following terms:Finding the Effective Interest Rate for Direct Financing Lease with IDCLessor Amortization TableOn January 1, 2012, Hells Gate Jet Boats and Washington Leasing Co. sign a lease with the following terms:Inception = 1/1/12PV ComputationsClassification of LeasesAcct 414 – Fall 2008 – Prof. Teresa Gordon1. Inception date: 1/1/122. Lessor: Troy Tractors Inc.3. Fair value of combine at 1/1/02: $50,0004. Cost to manufacture combine: $40,0005. Estimated fair value at end of lease is $10,0006. Fixed non-cancelable lease term: 5 years.7. First payment due on 12/31/128. Lessee: Farview Farms9. Incremental borrowing rate (lessee): 12%10.Implicit interest rate (lessor’s desired rate of return): 12%11.Option to buy at end of lease term for $5,00012.Estimated useful life of combine: 8 years1eNote that the last payment willinclude the $5,000 BPO1e$50,000 * 12%$13,083 - $6,000$50,000 - $7,0831eAn ordinary annuity situation – the first line includes interest1e1. Inception date: 1/1/122. Lessor: Troy Tractors Inc.3. Fair value of combine at 1/1/12: $50,0004. Estimated fair value at end of lease is $10,0005. First payment due on 1/1/126. Lessee: Farview Farms7. Fixed non-cancelable lease term: 6 years.8. Option to buy at end of lease term for $2,0009. Estimated useful life of combine: 8 years10. Desired rate of return for lessor and incremental borrowing rate for lessee: 12%11. The cost to manufacture the tractor is $40,000.1fWhat amount should the payment be given that the lessor requires a 12% return?1. Inception date: 1/1/122. Lessor: Troy Tractors Inc.3. Fair value of combine at 1/1/12: $50,0004. Estimated fair value at end of lease is $10,0005. First payment due on 1/1/126. Lessee: Farview Farms7. Fixed non-cancelable lease term: 6 years 8. Option to buy at end of lease term for $2,0009. Estimated useful life of combine: 8 years10. Desired rate of return for lessor and incremental borrowing rate for lessee: 12%11. The cost to manufacture the tractor is $40,000.12. Payment = 10,638Now, classify the lease1fNote that the first payment is ALL principalsince no interest has yet been incurred39,362 * 12%10,638 - 4,72339,362 - 5,915This is an annuity due situation – the first payment is 100% principal.1fNote that there is interest on the BPOThis is an annuity due situation – the first payment is 100% principal.1fIFRS vs. US GAAPIAS 17 vs. FAS 13 as amended many timesBut there’s more!Note that IFRS has no “bright line” rulesLeased assets are of a specialized nature and are only usable by the lessee unless substantial costs are incurred to modify (nothing comparable in US GAAP)Upon early termination of lease, lessee is responsible for lessor’s lossesAny gains & losses due to fluctuations in fair value of leased asset are attributed to the lesseeLessee has option to renew for below market costIFRS US GAAPFor Lessor Operating lease Operating leaseFinance lease Direct Financing LeaseFinance lease Sales-type leaseFinance lease Leveraged leaseFor Lessee Operating lease Operating leaseFinance lease Capital lease1. Inception of the lease: January 1, 2012 2. Term: 3 years 3. Implicit interest rate (known to lessee) 10% 4. Fair value of asset $100,000 5. Incremental borrowing rate: 12% 6. No collection or cost uncertainties for lessor 7. First payment due 1/1/12 8. Estimated useful life of asset: 5 years 9. Lessor retains ownership of asset at end of lease10. Cost of asset $100,00011. Payments of $36,556 per year21. Inception of the lease: January 1, 2012 2. Term: 3 years 3. Implicit interest rate 10% (NOT known to lessee but could be estimated) 4. Fair value of asset $100,000 5. Incremental borrowing rate: 12% 6. No collection or cost uncertainties for lessor 7. First payment due 1/1/12 8. Estimated useful life of asset: 5 years 9. Lessor retains ownership of asset at end of lease10. Cost of asset $100,00011. Payments of $36,556 per year2aWhat if the lessor’s rate were NOT known to lessee? What would be the PVMLP?What if we follow IFRS?1. Term: 3 years 3. Implicit interest rate (known to lessee) 10% 5. Fair value of asset $130,000 7. Incremental borrowing rate: 12% 9. Estimated useful life of asset: 5 years11.Purchase option at end of lease: $2,500 2. Payments of $________________ 4. Est. fair value of asset at end of lease $2,500 6. Cost of asset $100,000 8. First payment due 1/1/12 (at inception)10.No collection or cost uncertainties for lessor 4a1. Term: 3 years 3. Implicit interest rate =10% (known to lessee) 5. Fair value of asset $130,000 7. Incremental borrowing rate: 12% 9. Estimated useful life of asset: 5 years11.Purchase option at end of lease: $2,500 2. Payments of $46,836 4. Est. fair value of asset at end of lease $2,500 6. Cost of asset $100,000 8. First payment due 1/1/12 (at inception)10.No collection or cost uncertainties for lessor 4AClassify lease under US GAAP and IFRS1. Term: 3 years 3. Implicit interest rate =10% (NOT known to lessee but could be estimated) 5. Fair value of asset $130,000 7. Incremental borrowing rate: 12% 9. Estimated useful life of asset: 5 years11.Purchase option at end of lease: $2,500 2. Payments of $46,836 4. Est. fair value of asset at end of lease $2,500 6. Cost of asset $100,000 8. First payment due 1/1/12 (at inception)10.No collection or cost uncertainties for lessor 4BWhat if the lessor’s implicit rate is NOT known to lessee? Find the PVMLP.1. Term: 3 years 3. mplicit interest rate (NOT known to lessee) 10% 5. Fair value of asset $130,000 7. Incremental borrowing rate: 12% 9. Estimated useful life of asset: 5 years11.Purchase option at end


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