Becker question on Lease Bonuses – FAR

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  • #184959
    ramo10
    Member

    Im a little confused about the Lease Bonuses example for Operating Leases in F5 Becker material:

    Example on page 9:

    Company A purchases a machine on January 1, Year 1 for $1,500,000 with expected life of 10 years and no residual value (straight line depr). On January 1, year 1, Company B leases the machine from Company A for 3 years, at monthly rate of $32,000 and paid a Lease Bonus of $75,000. What is the Year 1 income related to the lease for the lessor.

    Monthly rentals (32,000×12) 384,000

    plus: Bonus amortization (75,000/3) 25,000

    less: Depreciation 150,000

    income from Leased asset Yr 1 259,000

    What i understood was that a Lease Bonus is like a prepaid expense for the Lessee, and an Unearned revenue for the Lessor.

    In the example, it asks what the income related to the lease should be, and it adds 25,000 of the Lease Bonus of 75,000 to the related income for the first year.

    Isnt the amount of $75,000 just an advance for the agreed on monthly rental of $32,000, and is only a cash prepayment of the rent. It isnt being given as additional consideration to the agreed amount, therefore it shouldnt change the amount of income recognized on a monthly or yearly basis.

    Can someone please help me clarify this out

Viewing 10 replies - 1 through 10 (of 10 total)
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  • #544185
    samdiegoCPA
    Member

    Does this explanation help?

    Lease bonus (fee)

    At the inception of the lease, the lessee may pay a nonrefundable lease bonus (fee) to the lessor in

    order to obtain more favorable leasing terms (e.g., a lease term of three years instead of five years).

    The lease bonus (fee) would be treated as unearned rent by the lessor and would be amortized to

    rental revenue on a straight-line basis over the lease term. The lessee would treat the lease bonus

    (fee) as prepaid rent and would recognize it as rental expense over the lease term on a straight-line

    basis.

    AUD: 84
    REG: 84
    BEC: 79
    FAR: 83

    #544206
    samdiegoCPA
    Member

    Does this explanation help?

    Lease bonus (fee)

    At the inception of the lease, the lessee may pay a nonrefundable lease bonus (fee) to the lessor in

    order to obtain more favorable leasing terms (e.g., a lease term of three years instead of five years).

    The lease bonus (fee) would be treated as unearned rent by the lessor and would be amortized to

    rental revenue on a straight-line basis over the lease term. The lessee would treat the lease bonus

    (fee) as prepaid rent and would recognize it as rental expense over the lease term on a straight-line

    basis.

    AUD: 84
    REG: 84
    BEC: 79
    FAR: 83

    #544187
    ramo10
    Member

    So, the Lease Bonus is not like a prepaid expense in that sense- its just treated like one. It is like an additional cost. Thanks for your help samdiego. The Becker text should really elaborate on it a little more, because you can't tell in the two line explanation they have given.

    #544208
    ramo10
    Member

    So, the Lease Bonus is not like a prepaid expense in that sense- its just treated like one. It is like an additional cost. Thanks for your help samdiego. The Becker text should really elaborate on it a little more, because you can't tell in the two line explanation they have given.

    #544189
    samdiegoCPA
    Member

    I actually had no idea what it was until now! My notes only say “Lessee records as blahblah, Lessor records are blehbleh” Okay, but why, what is it?! I hope I get a question on this now!

    AUD: 84
    REG: 84
    BEC: 79
    FAR: 83

    #544210
    samdiegoCPA
    Member

    I actually had no idea what it was until now! My notes only say “Lessee records as blahblah, Lessor records are blehbleh” Okay, but why, what is it?! I hope I get a question on this now!

    AUD: 84
    REG: 84
    BEC: 79
    FAR: 83

    #544191
    ramo10
    Member

    I hope we are correct in this. Can someone please second this explanation. Thanks again

    #544212
    ramo10
    Member

    I hope we are correct in this. Can someone please second this explanation. Thanks again

    #544193
    samdiegoCPA
    Member

    That was copied & pasted from the Wiley 2014 study guide, so it's def correct. How I understand it and will remember, is it's just like a bribe to get them to give you a better rate or deal. Then amortize it SL over the lease term. Easy!

    AUD: 84
    REG: 84
    BEC: 79
    FAR: 83

    #544214
    samdiegoCPA
    Member

    That was copied & pasted from the Wiley 2014 study guide, so it's def correct. How I understand it and will remember, is it's just like a bribe to get them to give you a better rate or deal. Then amortize it SL over the lease term. Easy!

    AUD: 84
    REG: 84
    BEC: 79
    FAR: 83

Viewing 10 replies - 1 through 10 (of 10 total)
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