Tutorial 1

Question from book Spiceland
BE 15.5


BE 15.6


BE 15.11


BE 15.12



Question from slide
1.
Finance lease
- A lease that transfers substantially all the risks & rewards incident to ownership from the lessor to the lessee.

Operating lease
- A lease that does not transfer substantially all the risks & rewards incident to ownership from the lessor to the lessee.

2.
Direct finance lease
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Sales type lease
- Differs from a direct financing lease in only one respect that is for recognizing the profit at the inception of the lease.

3.
Advantages of leasing
- Overcome cash flow problem
- The net cost of leasing often is less than the cost of purchasing when the operational, tax, & financial market advantages are considered.
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Disadvantages of leasing
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4.
Off Balance Sheet financing
- When funds are borrowed to purchase an asset, the liability has a detrimental effect on the company's debt-equity ratio & other quantifiable indicators of riskiness.
- Sometimes Off Balance Sheet financing helps a firm avoid exceeding contractual limits on designated financial ratios (like the debt to equity ratio).

5.
Substance over Form
- Report transaction/events based on commercial/economic reality & not strictly on legal form.
- Affect the accounting treatment of lease based on risks & rewards incident to the ownership.
- There are 2 substance of the transaction, that is a rental agreement & a purchase/sale accompanied by debt financing

6.
a) Lease term
- Lease term is 75% of expected life of the asset.

b) Bargain purchase option
- A provision in the lease contract that gives the lessee the option of purchasing the leased property at a bargain price.

c) MLP from the standpoint of the lessee & lessor
- Present value (PV) of the minimum lease payment (MLP) amounts is equal to @ greater than 90% of the fair value of the asset at the inception of the lease.

d) Interest rate implicit in the lease
- The desires rate of return the lessor has in mind when deciding the size of the rental payments.
- This is the effective interest rate the lease payments provide the lessor over & above the price at which the asset is sold under the lease.

e) Initial direct cost
- The costs incurred by the lessors that are associated directly with originating a lease & are essential to acquire that lease.

f) Executory cost
- Lease agreements usually are written in such a way that the costs; maintenance insurance, taxes, & any other costs are borne by the lessee.

7.
a) At the inception of lease
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b) During the first year of lease
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8.
Disclosure requirement for the lessee & lessor if the lease is
i) Finance lease
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ii) Operating lease
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9.
The owner of an asset wants to sell an asset & then lease it back because


10.



Question from handout
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