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CLFP EXAM (Financial and Tax Accounting for Leases) with Questions & Answers Graded A
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CLFP EXAM (Financial and Tax Accounting for Leases) with Questions & Answers Graded A
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CLFP EXAM (Financial and Tax Accounting forLeases) with Questions & Answers Graded A
What is Maximum Lease Payments? - ✔✔All payments the lessee is obligated to make under
the lease agreement (outside of executory costs)
1.) minimum rentals
2.) Lessee guarantee of the residual value
3.) Penalties for failure to renew.
4.) Calc for lessor to include guaranteed residual
What is a Non-Cancelable Lease? - ✔✔A lease that is only cancelable upon:
1.) Occurrence of some remote contingency;
2.) Permission of lessor;
3.) Entrance into a new lease with the same lessor;
4.) Payment of a penalty in an amount that makes continuation of the lease reasonably assured.
What is Renewal or Extension of a Lease? - ✔✔The continuation of a lease agreement beyond the
original term, including a new lease where the lessee continues to use the same property.
What is Sale-Leaseback Accounting? - ✔✔A method of accounting for transactions in which the
seller-lessee records the sale , removes the property and related liabilities from its balance sheet,
recognizes gain or loss from the sale and classifies the leaseback in accordance with proper lease
accounting
,What is Unguaranteed Residual Value? - ✔✔The estimated residual value of the leased
property exclusive of any portion guaranteed by the lessee or by a third party unrelated to the
lessor. If the guarantor is related to the lessor, the residual value is considered unguaranteed
What are the three types of Lessor Financial Statements classification? - ✔✔1.) Operating
2.) Direct financing (capital lease)
3) Sale-type (capital lease)
4) If lender is lending cash - typically capital lease
5) If lender is lending assets - typically operating lease
What dictates the proper treatment of a lease on the lessors books? - ✔✔ASC 840. If any of
the following are met at time of lease inception, capital lease treatment is required.
1). transfer of ownership at lease end;
2.) bargain purchase option;
3.) lease term >= 75% property economic useful life
4.) PV of payments > 90% of fair value (less tax credits)
If a criteria of ASC 840 is met, what additional criteria must be met to classify as a capital lease? -
✔✔In addition to meeting an ASC 840 criteria, both of the following must be met to classify as capital
lease:
1). collectibility is reasonably certain;
2.) No important uncertainties surround the amount of the non-reimbursable costs to be incurred by the
lessor under the lease.
How should manufacturer account for a sale-type lease? - ✔✔1.) take sale profit, or
2.) capitalize the expense as IDC
3.) Can't to both
How should a lessor account for a direct finance lease? - ✔✔Net investment (book value) in the
lease is recorded as an asset on the balance sheet:
+Gross Investment
, - Unearned Income
= Net Investment
What is Gross Investment? - ✔✔The sum of all the min. lease payments plus the un-
guaranteed residual value.
What is Unearned Income? - ✔✔Is the gross investment less asset cost.
How is debt accounted for by lessor in a direct finance lease? - ✔✔Debt incurred by lessor to
acquire equipment remains on the balance sheet as long term liability
How is Unearned Income accounted for on the Lessor Income Statement? - ✔✔Unearned income is
amortized over the lease term so as to produce a constant periodic rate of return on the net investment.
What is Initial Indirect Cost (IDC)? - ✔✔Could include fees paid to vendor/broker, internal
sales commissions and other expenses incurred by lessor associated with transaction.
How is IDC accounted for on Lessor financial statements? - ✔✔IDC incurred by lessor are
capitalized, reduced from expense and amortized on a straight-line basis over over the term of the
lease to offset income.
How should a Lessor account for residual values? - ✔✔1.) review residual values annually
2.) If decline, determine if temporary or permanent.
3.) if permanent, value is to be revised and loss in the investment during the current period.
4.) Residual values are never adjusted up, even in cases of past losses.
What are a lessor's required financial disclosures regarding direct finance leases? - ✔✔1.)
general description
2.) Future min. lease payments to be received (net of executory, non collectible expenses and profit)
3.) Unguaranteed residual value
4.) Unearned income
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