Question

Lessee leases printing machine from Lessor. Lessor agrees to provide all maintenance services. Lease payment is $1000 per month. Maintenance service has FMV of $200/month.

Over what period does a Lessee amortize the Right of Use Asset in a Financing lease? Operating lease?

How does the Lessee’s amortization of Right of Use Asset differ between Financing lease and Operating lease?

How does Lessee report the amortization and interest components of lease expense on the income statement under an Operating Lease?

How does the Lessee determine the appropriate discount rate to use in accounting for leases?

How does the Lessor’s discount rate differ when initial direct costs are capitalized versus when they are not capitalized?

At what amount does a Lessor measure the “Investment in Lease” asset account in a Sales lease? Direct Financing lease?

In a Sales lease in which the leased asset cost differs from market value at lease inception, how much sales revenue does the Lessor recognize? How much cost of sales does the Lessor recognize?

Answer 1

Q1.	Over what period does a Lessee amortize the Right of Use Asset in a Financing lease? Operating lease?
Ans.	Financing Lease: Lessee amortize the right to use of assets when assets is given on lease for whole econimic life of assets
	Ex. If life of assets is 10 year and the assets us given for a period of 9.5 year then in this case lessee can amortize the right to use
	Operation Lease: Lessee can never amortize the right of use asset in case of operating lease
Q2.	How does the Lessee’s amortization of Right of Use Asset differ between Financing lease and Operating lease?
Ans.	In case of financing lease the leesee becomes the owner of the assets after the expiry of lease period by giving a nominal amount but in case of operating lesase
	assesse never become the owner of the assets
Q3.	How does Lessee report the amortization and interest components of lease expense on the income statement under an Operating Lease?
Ans.	In case of operating lease the lessee reports the amortization and interest components as lease rent payment
Q4.	How does the Lessee determine the appropriate discount rate to use in accounting for leases?
Ans.	The lessee uses Internal Rate of Return concept to determine the appropriate dicount rate.
Q5.	How does the Lessor’s discount rate differ when initial direct costs are capitalized versus when they are not capitalized?
Ans.	When the initial costs are capitalized then the cost of assets got increased as compared to when initial cost are not capitalized, that why the discount rate differs.
Q6.	At what amount does a Lessor measure the “Investment in Lease” asset account in a Sales lease? Direct Financing lease?
Ans.	The gross amount of the investment in the lease is calculated as:
	Sum of minimum lease payments, less executory cost component + Unguaranteed residual value benefiting lessor
Q7.	In a Sales lease in which the leased asset cost differs from market value at lease inception, how much sales revenue does the Lessor recognize? How much cost of sales does the Lessor recognize?
Ans.	Sale price - Gross amount of investment in the lease- Initial direct costs+ Present value of unguaranteed residual value benefiting the lessor
	= Unearned income