Lease Classification.

8/19/2019 Lease Classification.

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ILLUSTRATION

O-1

(

A-t

E)

LESSEE'S LASSIFICATIONRITERIA OR

CAPITAL

LEASES

IFTHE

LEASEMEETS NE

OR

MORE

OF

THEFOLLOWING

HREE

RITERIA,

HE

LESSEE

UST

CLASSIFY

ND

ACCOUNT

ORTHE

ARRANGEMENT

S A

CAPITAL

EASE:

1. THE

EASERANSFERS

WNERSHIP

F

THE

ROPERTY

OTHE ESSEEOR

THE

EASE

ONTAINS

BARGAINURCHASEPT]ON.

2.THE

EASEERM

S

EQUAL

O

75%

OR

MOREOF

THE

STIMATED

ECONOM]C

IFE

F

THE EASEDROPERTY.

3.

THE

PRESENT

ALUE

OF

THE

MINIMUM

EASE

AYMENTS

EXCLUDING

EXECUTORY

OSTS)

QUALS

R

EXCEEDS

0%OF

THE

FAIR

VALUE

OF

THE EASED

ROPERTY.



ILLUSTRATION

0.2

LESSEE-CAPITAL

EASE

LESSOR_DIRECT

INANCING

EASE

EXAMPLE

On January1,2005,

Velde

Company

lessee)

ntered nto

a

4-year,

noncancellable

ontract

to lease

a

computer

from Fxceptional

Computer

Company

(lessor).

Annual

rentals

of

$17,208

are

to be

paid

each January 1.

Velde will

assume

esponsibility or

all normal

ownership

costs, and

at the end

of the lease

period

the computer will

be returned

to

Exceptional

Computer

Company.

The

cost of the

computer

to

Exceptional

Computer

Company

was

$60,000

and it had

an estimated

useful life

of

four

years

and no

residual

value. Velde has an incremental orrowing rateof 12%but hasknowledge hat Exceptional

Computer

Companyused a rate

of l0% in

setting

annual entals.

Collection

of the rentals

s

reasonably

predictable

and there

are

no important

uncertainties

regarding

future

unreimbursable

osts o

be

ncurred

by the essor.

Capitalization

Criteria

Lessee

Lessor

Criteria l

Criteria#2

Critefia #3

(

Ar

PE)

No

Yes

Yes

Group

:

Criteria

1

Criteria #2

Criteia

#3

Group I:

Criteria 1

Crrteria#2

Direct

financing ease

because ost

of

computer fair

value.

No

Yes

Yes

Yes

Yes

VELDE

COMPANY

$17,208

3.48685

$60.000

(Table

-5)

EXCEPTIONAL

COMPUTER

COMPANY

Annual ental

F.V.

$60.000

$17,208

3.48685

x

4

$68332



fLLUSTRATION

0-2

continued)

VELDE

COMPANY

Leased

Computer

Obligations

Under

CapitalLeases

60,000

EXCEPTIONAL

COMPUTER

CO.

January

1. 2005

LeasePayments

Receivable

60,000

17,208

Cash

December

l

Unearned nterest

Income

Computer

LeasePayments

Receivable

2005

68,832

17,208

[

* , ,

|

60,000

Obligations

nder

Capital eases

Cash

Amortization

Expense

Accumulated

Amortization

Interest

Expense

Interest

Payable

17,208

15,000

4,279

15,000

4,279

Unearned nterest

ncome

4,279

Interest

ncome

17,208

4,279

Interest

Payable

Obligations

Under

CapitalLeases

Cash

Januarv

. 2006

17,208

December

1 2006

15,000

2,996

Cash

Lease

Payments

Receivable

4,279

12,929

15,000

17,208

Amortization

Expense

17,208

2,996

Accumulated

mortization

Interest

xpense

2,986

Interest avable

Unearnednterest

ncome

2,986

Interestncome



ILLUSTRATION

0-2

conti

ued)

VELDE

COMPANY

EXCEPTIONAL

COMPUTER

COMPANY

Interest

Payable

2,986

ObligationsUnder

Capital

Leases

14,222

Cash

Amortization

xpense

15,000

Accumulated mortization

Interest

xpense

I,567

Interest ayable

Interest

ayable

1,567

Obligations

Under

CapitalLeases

15,64I

Cash

Amortization

Expense

15,000

Accumulated

Amortization

Accumulated

Amortization

60,000

Leased

omputer

January1. 2007

Cash

17,208

LeasePayments

Receivable

17,209

December

1.

2007

15,000

1,567

17,208

17,208

1,567

17,208

Unearned nterest

Income

I,567

Interest

ncome

January

.2008

Cash

LeasePayments

Receivable

17.208

December

1.

2008

15,000

60,000

1 0



ILLUSTRATION

0-2

continued)

LEASE

MORTIZATION

CHEDULES

Date

Jan.

2005

Jan.

2005

Jan.

2006

Jan.

1

2007

Jan. ,2008

Jan. ,2005

Jan.

2005

Jan.

,2006

Jan.

2007

Jan.

.2008

Annual

Lease

ayment

$

17,208

17,209

17,209

17,209

VELDE

COMPANY

(10%)

Reduction

f

Interest

Obligation

$

-0-

$17,209

4,279

12,929

2,996

14,222

1,567*

15,641

Investment

Recovery

$

17,209

12,g2g

14,222

15,64r

Lease

Obligation

$60,000

42,792

29,963

15,641

-0-

Net

Investment

$60,000

42,792

42,792

9,8

6

t

15,641

-0-

EXCEPTIONAL

COMPUTER

COMPANY

Date

Annual

Lease

Payment

$

17,209

17,209

17,209

17,209

( r0%)

Interest

$

-o-

4,279

2,996

1,567*

*Adjusted

for rounding.

l l



TLLUSTRATION

O-4

AsFE)

LESSOR'S

LASSIFICATION

RITERIA

FORDIRECT

INANCING

ND

SALES-TYPE

LEASES

GROUP

THE

LEASE GREEMENTUST

MEET

ONE OR

MORE

OF

THEFOLLOWING

CRITERIA:

1. THE EASERANSFERSWNERSHIPFTHEPROPERTYOTHE ESSEER

THE EASE

ONTAINS

BARGAINURCHASE

PTION.

2, THELEASE ERM

S EQUALTO

75%

OR

MORE

OF

THE

ESTIMATED

ECONOMICIFE

F

THE

EASEDROPERTY.

3.

THEPRESENTALUE

OF

THE

MINIMUM EASE AYMENTS

EXCLUDING

EXECUTORY

OSTS)

QUALS

R

EXCEEDS

0%

OF

THE AIR

ALUE

F

THE

LEASEDROPERTY.

GROUPI

THE

LEASE GREEMENT

USTMEETBOTH

OF

THEFOLLOWING

CRITERIA:

I . THE

REDIT

ISK SSOCIATEDITH

HE EASE

S

NORMAL HEN

COMPARED

O

THE ISK

FCOLLECTION

FSIMILAR

ECEIVABLES.

2. THE

AMOUNTS

OF

ANY

UNREIMBURSABLE

OSTS

HATARELIKELYTO

E

INCURRED

YTHE ESSOR

NDERHE EASE

AN

BEREASONABLY

ESTIMATED.

13



ILLUSTRATION

0.5

(

hS

PE)

LESSOR-SALES-TYPE

EAS

E

LESSEE-CAPITAL

EASE

EXAMPLE

On

Januaty

1,2005,

Velde

Company lessee)

ntered

nto

a

4-year,

noncancellable

ontract

to lease

a

computer

from

Exceptional

Computer

Company

(lessor).

Annual

rentals

of

$17'208

are

to

be

paid

each January

1,

Velde

will

assume

esponsibility

or

all

normal

ownership

costs,

and

at the

end

of

the lease

period

the

computer

will

be returned

to

Exceptional

Computer

Company.

The

cost

of the

computer

to Exceptional

Computer

Company

was

$40'000

and it

had

an

estimated

air

value

of

$60,000,

an estimated

useful

ife

of four

years

and no

residual

value.

Velde

has

an incremental

borrowing

rate

of

12%

but

has knowledgethat Exceptional ComputerCompany used a rate of I0% in setting annual

rentals.

Collection

of the rentals

is

reasonably predictable

and

there

are no

important

uncertainties

egarding

uture

unreimbursable

osts

o

be incurred

by the lessor.

Capitalization

Criteria

Lessee

Lessor

Criteria

1

Criteria#2

Criteria 3

VELDE

COMPANY

Present

alue

$17,208

3.48685

$60,000

(Table

-5)

Leased

omputer

60,000

Obligations

nder

Capital

eases

Group :

No

Criteria

1

Yes

Criteria

#2

Yes

Criteria 3

Group

I:

Criteria# 1

Criteria

#2

No

Yes

Yes

Yes

Yes

Sales-type

ease

ecause

here

s

a

dealer

profit

of

$20,000

EXCEPTIONAL

COMPUTER

COMPANY

Annual

rental

F.V.

$60 000

$17,208

3.48685

x

4

January .2oo5

$68-832

Lease

ayments

eceivable

8,832

Cost

f

Goods

old

40,000

Inventory

Unearned nterest

ncome

-e€mputg.Lr.

'c, '

:,

i

6.1rtht, .G'r

40,000

8,832

60,000

60.000

t 4



ILLUSTRATION

0-5

continued)

VELDE

COMPANY

Obligations

nder

Capital eases

17,208

Cash

Amortization

xpense

15,000

Accumulated

mortization

Interest

Expense

4,279

Interest

Pavable

EXCEPTIONAL

COMPUTER

COMPANY

Cash

17,208

Lease

Payments

17.208

Receivable

17,208

December

1.2005

15,000

Unearnednterest

ncome

4,279

4,279

Interest

ncome

4,279

Interest

Payable

4,279

Obligations

Under

Capital

Leases

12,929

Cash

Amortization

xpense

15,000

Accumulated

mortization

Interest

Expense

2,986

Interest

Pavable

January . 2006

Cash

17,208

Lease

Payments

Receivable

17.208

December

1.2006

17,208

15,000

Unearned

nterest

ncome

2,986

2.986

Interest

ncome

2,986

Interest

Payable

2,986

Obligations

Under

Capital

Leases

14,222

Cash

Amortization

Expense

15,000

Accumulated

Amortization

January

.2007

Cash

LeasePayments

Receivable

17,208

December

1.2007

17,208

17,208

15,000

l 5



ILLUSTRATION

0-5

continued)

VELDE

COMPANY

Interest

xpense

1,567

Interest

Payable

EXCEPTIONAL

COMPUTER

COMPANY

Unearned nterest ncome 1,567

1,567

Interest

ncome

1,567

Interest

ayable

1,567

Obligations

nder

Capital

eases

15,641

Cash

Amortization

Expense

15,000

Accumulated

Amortization

Accumulated

Amortization

60.000

Leased

Computer

January

.2008

Cash

Lease

Payments

Receivable

17,209

December

1.2008

17,209

17,208

15,000

60.000

t 6



ILLUSTRATION

0'8

(

A5

FE)

RESI

DUAL

VALU

E-G

UARANTE

ED

LESSEE-CAPITAL

EASE

LESSOR-DIRECT

INANCING

EASE

EXAMPLE

On January1,2005,

Velde

Company

lessee)

ntered nto

a 4-year,

oncancellable

ontract

to

lease

a computer

from

Exceptional

Computer

Company

(lessor).

Annual

rentals

of

S161228

re to

be

paid

each January

l, Velde

will

assume esponsibility

or

all normal

ownership

costs, and

at the end

of

the lease

period

the computer

will

be returned

o

Exceptional

Computer

Company.

The

cost

of the

computer

to Exceptional

Computer

Company

was

$60,000

and t had

an estimated

seful ife

of four

years

and

a

$5,000

esidual

value. Velde

has

guaranteed

he lessor

a residual

value

of

$5,000.

Velde has

an incremental

borrowing rate

of l2%o

but has knowledge

hat Exceptional

Computer

Company

used

a

rate

of l}oh in

settingannual entals.

Collection

of the rentals

s reasonably

redictable

nd

here

are no important

uncertainties

egarding

future

unreimbursable

costs

to

be

incurred

by the

lessor.

At

the end of the

ease

erm, he

computer's

air value

was

$5,000.

Capitalization

Criteria

Lessee

Lessor

Criteria#l

Criteria #2

Criteria#3

No

Yes

Yes

Group :

Criteria

#1

Crrterra#2

Criteria#3

Group I:

Criteria

#1

Criterta #2

Direct financing

ease

because ost

of

computer

fair value.

No

Yes

Yes

Yes

Yes

2 l



fLLUSTRATION

0-8

continued)

VBLDE COMPANY

EXCEPTIONAL COMPUTER

COMPANY

Annual

rental

Cost

$60,000

T(A-2) 3.415

P.

V.

of

residual)

516,228

3.48685

$56,585

$56.585

:

516,228

Rent)

(Table

-5)

T(A-5) 3.48685

x

4

$

5,000

.68301

3.415

64,912

(Table

A-2)

Residual

alue

5.000

$60J00

$@pJ2

Present

alue

Leased omputer

60,000

Obligations

nder

Capital

eases

January

1.

2005

Lease

Payments

Receivable

69,912

60,000

Unearned

nterest

Income

Computer

Cash

LeasePayments

Receivable

16,228

December1

2005

13,7 0

Unearned

nterest

4,,377

Income

4,377

Interest

ncome

Obligations

nder

I

Capital eases 16,2281

Cash

|

16,228

9,912

60,000

16,228

4,377

Amortization

xpense

13,750

|

Accumulated

mortization

I

InterestExpense

4,377

Interest

Payable

InterestPayable

4,377

Obligations

Under

Capital

Leases

11,851

Cash

January

.2006

16,228

22

Cash

Lease

Payments

Receivable

16,228

16,228



December 1.

2006

AmortizationExpense 13,750|

Accumulated

mortization

|

13,750

ILLUSTRATION

0-8

continued)

VELDE

COMPANY

Interest

Expense

3,192

InterestPavable

EXCEPTIONAL

COMPUTER

COMPANY

Unearned

nterest

3,192

Income

Interest

ncome

3,192

3,r92

January

.2007

Interest

Payable

3,192

Obligations

Under

Capital

Leases

13,036

Cash

Amortization

xpense

13,7 0

Accumulated

mortization

Interest

xpense

1,889

InterestPayable

16,228

December

1.2007

13,7 0

Unearned

nterest

1,889

Income

Interest

ncome

Cash

Lease

Payments

Receivable

16,228

1,889

16,228

1,989

Interest ayable

1,889

Obligations

Under

CapitalLease

14,339

Cash

Amortization

Expense

I3,750

Accumulated

Amortization

January

.2008

16,228

December

1.

2008

Cash

LeasePayments

Receivable

16,228

16,228

13,7 0

23



ILLUSTRATION

0-8

continued)

Interest

Expense

Obligations

Under

Capital

Lease

Accumulated

Amortization

LeasedComputer

60.000

LEASE

AMORTIZATION

SCHEDULES

VELDECOMPANY

Unearned

nterest ncome

Interest

ncome

Computer

Lease

Payments

Receivable

Reduction

of

Obligation

sl6,228

11 , 8 5 1

13,036

14,339

4,546

454

4,546

55,000

454

5,000

454

5,000

Jan. ,2005

Jan.

2005

Jan.

2006

Jan.

,2007

Jan.

,2008

Dec.

1,2008

Annual

Lease

Payment

sl6,228

16,228

16,228

16,228

5,000

Annual

LeasePayment

$16,228

16,228

16,228

16,228

5,000

Date

(10%)

Interest

$

-0-

4,377

3,192

1,989

454*

( t0%)

Interest

$

-0-

4,377

3,192

1,889

454*

Investment

Recovery

$16,228

1

1 , 8 5 1

13,036

14,339

4,546

Lease

Obligation

s60,000

43,772

31,921

18 , 885

4,546

-o-

Net

Investment

$60,000

43,772

31,921

18,885

4,546

-0-

EXCEPTIONAL

COMPUTER

OMPANY

Date

Jan.

,2005

Jan.

2005

Jan.

,2006

Jan.

,2007

Jan.

,2008

Dec.

1,2008

*Adjusted

for rounding.

24



ILLUSTRATION

0-9

ASPE)

RESI

DUAL

VALU

E-U NGUARANTEED

LESSEE-CAPITAL

EASE

LESSOR_DIRECT

INANCING

EASE

EXAMPLE

On

January

1

2005,

Velde Company

lessee)

ntered

nto a

4-year,

noncancellable

ontract

to

lease

a computer

from

Exceptional

Computer

Company

(lessor).

Annual

rentals

of

S161228

re to

be

paid

each

January

1, Velde

will assume

esponsibility

or all

normal

ownership

costs,

and

at the

end of

the

lease

period

the

computer

will be

returned

to

Exceptional

Computer

Company.

The cost

of

the computer

to

Exceptional

Computer

Company

was

$60,000

and

t

had an estimated

useful

ife of

four

years

and

a

$5'000

residual

value.

Velde

has

an incremental

borrowing

rate of

12% but

has knowledge

that Exceptional

Computer

Company

used

a rateof

l0o/o

n

setting

annual

entals.Collection

of the

rentals s

reasonably

predictable and

there

are no

important

uncertainties

regarding

future

unreimbursable

osts

o be

ncurred

by the

essor.

At the

end of

the ease

erm,

he computer's

fair

valuewas

$4 000.

Capitalization

Criteria

Lessee

Lessor

Criteria

1

Criteria

#2

Criteria

3

No

Yes

Yes

Group

:

Criteria

1

Criteria

#2

Criteria#3

Group

I:

Criteria

l

Criteria

#2

Direct

financing

easebecause

ostof

computer:

fair value.

No

Yes

Yes

Yes

Yes

VELDE COMPANY

$16,228

3.48685

$56J85

(Table

-5)

EXCEPTIONAL

COMPUTBR

COMPANY

Annual

ental

Cost $60,000

r(A-2)

3.41s

P.

$56 585

T(A-s) 3.4868s

Residual

alue

V. of

residual)

516,228

Rent)

x 4

64,,912

5.000

$6egl2

25



January .2005

LeasedComputer

56,585

|

f,easePayments

Obligations

Under

I

Receivable 69,912

Capital

Leases

I

56,585 Unearned

nterest

ncome

Computer

Obligations nder

I

Cash

16,228

Capital

eases

16,2281 Lease ayments

Cash

|

16,228

Receivable

fLLUSTRATION

0-g

continued)

VELDECOMPANY

EXCEPTIONAL

COMPUTER COMPANY

December 1.

2005

14,146

Unearned

nterest ncome

4,377

4,036 Interest

ncome

4,377

9,912

60,000

16,228

AmortizationExpense

14,146

Accumulated

Amortization

InterestExpense 4,036

InterestPayable

InterestPayable

4,036

ObligationsUnder

Capital

Leases 12,192

Cash

AmortizationExpense 14,146

AccumulatedAmortization

Interest

Expense

2,817

InterestPayable

January.2006

Cash

16,228

Lease ayments

Receivable

16,228

December 1. 2006

14,146

Unearned

nterest ncome 3,192

2,817

Interest

ncome

16,228

3,192

26



fLLUSTRATION

0-g

continued)

VELDE

COMPANY

EXCEPTIONAL

COMPUTER

COMPANY

Januarv

.2007

Cash

LeasePayments

Receivable

16,228

r6,229

December

1

2007

InterestPayable

ObligationsUnder

Capital Leases

Cash

2,817

13,4ll

16,228

Amortization

Expense 14,,r46

Accumulated

Amortization

14,146

Interest

xpense

1,47 l

Interest ayable

|

1.474

Unearned nterest ncome

Interest

ncome

1 , 889

l , 8 g g

Interest

Payable

ObligationsUnder

Capital Lease

Cash

January .2008

Cash

LeasePayments

Receivable

16,228

I ,474

14,7

4

rc,2281

I

16,228

454

454

4,000

1,000

5,000

Amortization

xpense

14,147

|

Accumulated

mortization

I

Accumulated

Amortization

Leased

Computer

December

1.2008

Unearnednterestncome

56,sss

I

14,147

56,585

Interest ncome

Computer

Loss

on

Lease

LeasePayments

Receivable

27



ILLUSTRATION

0-9

continued)

LEASE

AMORTIZATION

CHEDULES

Date

Jan.

,2005

Jan.

,2005

Jan.

,2006

Jan.

,2007

Jan.

,2008

Annual

Lease

ayment

$16,228

16,228

16,228

16,228

Annual

LeasePayment

s16,228

16,228

16,228

16,228

5,000

VELDE COMPANY

(10%)

Interest

s

-0-

4,036

2,817

1,474*

(r0%)

Interest

s

-0-

4,377

3,192

1,889

454*

Reduction f

Obligation

$16,228

12,192

13,411

14,7

4

Investment

Recovery

s|6,228

I

1 , 8 5 1

13,036

14,339

4,546

EXCBPTIONAL

COMPUTER

COMPANY

Lease

Obligation

$56,585

40,357

28,165

14,7 4

-0-

Net

Investment

$60,000

43,772

31,921

18,885

4,546

-0-

Date

Jan.

2005

Jan. ,2005

Jan.

,2006

Jan.

,2007

Jan.

,2008

Dec. 1, 008

*Adjusted

for rounding.

28

Lease Classification.

Documents

Transcript of Lease Classification.