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The document discusses several topics regarding accounting for leases: 1. A lessee considers factors like transfer of title, bargain purchase options, guaranteed/unguaranteed residual values when depreciating the right-of-use asset. 2. For operating leases with uneven rental payments, the total cash payments are amortized uniformly over the lease term as rent expense/income for both the lessor and lessee. 3. A sale and leaseback transaction involves an entity selling an asset to another entity and then leasing that same asset back, allowing the seller to obtain financing while the buyer acquires the asset.

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58 views3 pages

Group Activity

The document discusses several topics regarding accounting for leases: 1. A lessee considers factors like transfer of title, bargain purchase options, guaranteed/unguaranteed residual values when depreciating the right-of-use asset. 2. For operating leases with uneven rental payments, the total cash payments are amortized uniformly over the lease term as rent expense/income for both the lessor and lessee. 3. A sale and leaseback transaction involves an entity selling an asset to another entity and then leasing that same asset back, allowing the seller to obtain financing while the buyer acquires the asset.

Uploaded by

Park Minyoung
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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1.

How does a lessee consider each of the following in depreciating the right-
of-use asset

a. Provision for transfer of title at the end of the lease term


The depreciation policy for assets held under finance leases should be
consistent with that for owned assets. If there is no reasonable certainty that
the lessee will obtain ownership at the end of the lease term or the life of the
asset.

b. Bargain purchase option


A bargain purchase option is a clause in a lease agreement that allows the
lessee to purchase the leased asset at the end of the lease period at a price
substantially below its fair market value.

c. Guaranteed residual value


The guaranteed residual value (GRV) is the residual value of a leased asset
that is guaranteed by the lessee or by a financially capable third party not
related to the lessor and included in the minimum lease payments to be made
by the lessee.

d. Unguaranteed residual value


Unguaranteed residual value refers to the worth of a lease property at the end
of the agreement's term that is not the responsibility of the lessee.
Unguaranteed residual values do not qualify as a financial obligation of the
lessee, and do not factor into the calculation of the minimum lease payment.

7. Describe the accounting procedure for uneven rental payments collected by


the lessor in an operating lease.

Unequal Rental Payment

If unequal cash payments are required the total cash payment for the lease term
shall be amortized uniformly on the straight line basis as rent expense or rent income.

Parties of Operating Lease

Operating Lease – Lessee

 Rental is recognized as expense


 Lease bonus (payment in addition to periodic rental) is treated as a prepaid rent
expense and is to be amortized over the lease term.
 Any leasehold improvements shall be depreciated over the life of the
improvement or lease term (the period of the lease) whichever is SHORTER.
 Its security deposits is treated an asset.

Operating Lease – Lessor

 Rental is recognized as rent income.


 The property remains the asset of the lessor, meaning that he bears all the
ownership of the property and all its executor cost such as taxes, insurance and
maintenance cost.
 Any security deposit refundable upon the expiration of the lease shall be
accounted for as liability.
 Lease bonus received is recognized as unearned rent income and to be
amortized over the lease term.

Accounting for Depreciation of Leased Asset

Depreciation of any asset required for the purpose of leasing the asset is from the date
of acquisition, because idle property is subject to depreciation as long as its available
for its intended use.

Unequal Rental Payment

PAS 17 provides that “lease payments, under operating lease shall be recognized is a
straight line basis over the lease term unless another systematic basis is representative
of the time pattern of the users benefit.”

If unequal cash payments are required, the total cash payment for the lease term shall
be amortized uniformly on the straight line basis as rent expense or rent income.

9. What is a sale and leaseback transaction?

A sale and leaseback transaction is one where an entity (the seller-lessee) transfers of
an asset to another entity (the buyer-lessor) for consideration and leases that asset
back from the buyer-lessor.

A sale and leaseback transaction is a popular way for entities to secure long-term
financing substantial property, plant and equipment assets such as land and buildings.

‘s

References:
Carroll S. (2019). IFRS 16 Sale and leaseback accounting. Retrieved from:
https://www.granthornton.global/en/insights/ifrs-16/ifrs-16---sale-and-leaseback-
accounting/

Geemiz (2011). “Operating Lease” Practical Accounting 1, Theory of Accounts.


Retrieved from: https://www.geemiz.com/accounting/theory-of-accounts-/operating-
lease.html

Kenton, W. (2020, April 30). Bargain Purchase Option. Investopedia. Retrieved from:
https://www.investopedia.com/terms/b/bargain-purchase-option.asp#:%7E:text=A
%20bargain%20purchase%20option%20is,below%20its%20fair%20market
%20value.KPMG

Unguaranteed Residual Value. (n.d.). Money-Zine. Retrieved from: https://money-


zine.com/definitions/investing-dictionary/unguaranteed-residual-value/

Valix et al. (2020). Intermediate Accounting 2020 ed. Manila, Philippines: GIC
ENTERPRISES & CO. INC. What is a residual value? What is the stipulated loss value
of a lease? 2019. Pecunica. Retrieved from:
https://pecunica.com/knowledge-point/what-is-a-residual-value-guarantee-what-is-the-
stipulated-loss-value-of-a-lease/#:~:text=The%20guaranteed%20residual%20value
%20(GRV,be%20made%20by%20the%20lessee

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