[Anonymous]

Hi All,

I am working on assignment for school, and I was hoping to get some feedback for those of you studying for FAR.

I am trying to structure a capital lease based on the information provided below:

List Price: 1,900,000

Can typically be purchased for 1,800,000

Lease Term: 5 years

Useful life: 5-10 years

Salvage Value: 10,000 – 100,000 (Depending on when the asset was sold)

Lessee’s Credit-adjusted risk free rate: 5%

Lessor’s required rate of return: 6%

1.) When calculating lease payments would one use the list price or the price that it could typically purchased for?

2.) When creating the lease schedule, would one use the lessee’s interest rate, or the lessor’s required rate of return?

Yes, I am a CPA, but I haven’t looked at leases in quite a while. I figured someone who had freshly studied it could give a quicker answer 🙂

[Whopper Warrior]

pretty sure it would be the typical purchace (1.8m fmv) and the 6% rate because it is known. As far as the residual value, if it is not included in the lease terms (ie no guaranteed residual value to the lessor) I would exclude it from my lease calc but may take it into consideration for depreciation.

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[Whopper Warrior]

pretty sure it would be the typical purchace (1.8m fmv) and the 6% rate because it is known. As far as the residual value, if it is not included in the lease terms (ie no guaranteed residual value to the lessor) I would exclude it from my lease calc but may take it into consideration for depreciation.

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[Nevergiveup2012]

In regards to the lease payments: use the Present value of the lesser of FV at inception or cost . FV = $1.8m, cost = 1.9. so the lesser would be $1.8M .

As far as the interest rate to determine the lease expense/liability, use the lesser of lessor's implicit rate (if known) or lesse's incremental borrowing rate. Lessor's rate is known but not less than lesse's rate , so use lesse's rate of 5%.

Salvage value is ignored unless it's part of the guaranteed residual value written in the lease agreement.

Hope this helps

BEC - 86 (8/31/12)
AUD - 97 (11/18/12)
REG - 83 (5/12/13)
FAR - 91 (12/2/13)
Done!!!

[Nevergiveup2012]

In regards to the lease payments: use the Present value of the lesser of FV at inception or cost . FV = $1.8m, cost = 1.9. so the lesser would be $1.8M .

As far as the interest rate to determine the lease expense/liability, use the lesser of lessor's implicit rate (if known) or lesse's incremental borrowing rate. Lessor's rate is known but not less than lesse's rate , so use lesse's rate of 5%.

Salvage value is ignored unless it's part of the guaranteed residual value written in the lease agreement.

Hope this helps

BEC - 86 (8/31/12)
AUD - 97 (11/18/12)
REG - 83 (5/12/13)
FAR - 91 (12/2/13)
Done!!!

[musicamor]

I have a capital lease test schedule if you would like it–it requires judgmental inputs; however, it's easy to follow and could help potentially calc. a capital lease entry. musicamor02@msn.com

Texas CPA - licensed in 2012!!!

[musicamor]

I have a capital lease test schedule if you would like it–it requires judgmental inputs; however, it's easy to follow and could help potentially calc. a capital lease entry. musicamor02@msn.com

Texas CPA - licensed in 2012!!!

[CPA soon]

@Benboy are you trying to say that we're going to see those CPA mcq's in real life after we pass hahah 😉

FAR - 71, 68, 74, (8/31/14) 78 ✔
REG - 67, 71, 71, (10/18/14) 78 ✔
BEC - (11/29/14) 86 ✔
AUD - 73, (4/4/15) 86 ✔

I can't believe this is over! 2 years and 3 months..

[CPA soon]

@Benboy are you trying to say that we're going to see those CPA mcq's in real life after we pass hahah 😉

FAR - 71, 68, 74, (8/31/14) 78 ✔
REG - 67, 71, 71, (10/18/14) 78 ✔
BEC - (11/29/14) 86 ✔
AUD - 73, (4/4/15) 86 ✔

I can't believe this is over! 2 years and 3 months..

[Author]

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