Intermediate Accounting Kieso 11th Edition

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1、 Intermediate Accounting Eleventh?Edition Chapter?21 Accounting?for?Leases Donald?E.?Kieso Jerry?J.?Weygandt Terry?D.?Warfield Intermediate Accounting by: Donald?E.?Kieso,?Ph

2、.D.,?C.P.A. KPMG?Peat?Marwick?Emeritus?Professor?of?Accounting?Northern?Illinois?University?DeKalb, Illinois Jerry?J.?Weygandt,?Ph.D.,?C.P.A. Arthur?Andersen?Alumni?Professor?of?Accounting?University?of?Wisconsin?Madison, Wisconsin Terry?D.?Warfield,?Ph.D. Associate?Professor?University?of?Wisc

3、onsin?Madison,?Wisconsin Copyright???2004?John?Wiley?&?Sons,?Inc.?All?rights?reserved. John?Wiley?&?Sons,?Inc. 111?River?St.,?6th?Floor,?Hoboken,?NJ?07030 0471072087 ii Table of Contents Intermediate?Accounting Table?of?Conten

4、ts BASICS OF LEASING..................................................................................................................... 3 Advantages?of?Leasing................................................................................................................ 3 Conce

5、ptual?Nature?of?a?Lease.................................................................................................... 5 ACCOUNTING BY LESSEE........................................................................................................... 7 Capitalization?Criteria...................

6、.............................................................................................. 8 Asset?and?Liability?Accounted?for?Differently...................................................................... 11 Capital?Lease?Method?(Lessee).....................................................

7、........................................... 12 Operating?Method?(Lessee)...................................................................................................... 16 Comparison?of?Capital?Lease?with?Operating?Lease............................................................ 16 ACCOUNT

8、ING BY LESSOR........................................................................................................ 19 Economics?of?Leasing................................................................................................................ 19 Classification?of?Leases?by?the?Lessor...

9、.................................................................................. 20 Direct-Financing?Method?(Lessor)........................................................................................... 22 Operating? Method? (Lessor)..........................................................

10、............................................ 26 SPECIAL ACCOUNTING PROBLEMS..................................................................................... 27 Residual?Values.......................................................................................................................

11、... 27 Sales-Type? Leases? (Lessor)....................................................................................................... 34 Bargain?Purchase?Option?(Lessee)........................................................................................... 37 Initial?Direct?Costs?(Lessor

12、)...................................................................................................... 38 Current? versus? Noncurrent...................................................................................................... 38 Disclosing?Lease?Data.....................................

13、........................................................................... 40 LEASE ACCOUNTING—UNSOLVED PROBLEMS.............................................................. 43 Illustrations of Lease Arrangements....................................................................................

14、....... 50 HARMON, INC............................................................................................................................... 51 ARDEN'S OVEN CO...................................................................................................................... 52 MENDOTA

15、 TRUCK CO............................................................................................................... 54 APPLELAND COMPUTER........................................................................................................... 55 Sale-Leasebacks..............................

16、................................................................................................. 57 DETERMINING ASSET USE....................................................................................................... 58 Lessee........... 58 Lessor........... 59 SALE-LEASEBACK ILLUSTRATI

17、ON........................................................................................ 60 iii Intermediate?Accounting Table?of?Contents iv In

18、termediate?Accounting Chapter?21 More Companies Ask, “Why Buy?” Leasing?has?grown?tremendously?in?popularity?and?today?is?the?fastest-growing?form?of capital?investment.?Instead?of?borrowing?money?to?buy?an?airplane,?a?computer,?a?nuclear core,?or?a?satellite,?a?company?makes?periodic?payme

19、nts?to?lease?the?asset.?Even?the?gambling casinos?lease?their?slot?machines.?Airlines?and?railroads?lease?huge?amounts?of?equipment; many?hotel?and?motel?chains?lease?their?facilities;?and?most?retail?chains?lease?the?bulk?of their?retail?premises?and?warehouses.?The?popularity?of?leasing?is?evidenc

20、ed?in?the?fact?that 558?of?600?companies?surveyed?by?the?AICPA?in?2001?disclosed?lease?data.1 A?classic?example?is?the?airline?industry.?Many?travelers?on?airlines?such?as?United,?Delta, and?Southwest believe?the?planes?they?are?flying?are?owned?by?these?airlines.?But?in?many cases,?nothing?coul

21、d?be?further?from?the?truth.?Here?are?recent?lease?percentages?for?the major?U.S.?airlines. Why?do?airline?companies?lease?many?of?their?airplanes??One?reason?is?the?favorable accounting?treatment?that?airlines?receive?if?they?lease?rather?than?purchase.?By

22、?not?reporting the?airplane?and?related?borrowing?on?their?balance?sheets,?companies?lower?their?debt?to equity?ratios.?In?addition,?companies?that?lease?often?report?higher?net?income?in?the?earlier years?of?the?life?of?the?airplane. Page?1 Intermediate?Accountin

23、g Chapter?21 PREVIEW OF CHAPTER 21 Because?of?the?increased?significance?and?prevalence?of?lease?arrangements?indicated?in?the opening?story,?the?need?for?uniform?accounting?and?complete?informative?reporting?of?these transactions?has?intensified.?In?this?chapter,?we?will?look?at?the?accoun

24、ting?issues?related?to leasing. The?content?and?organization?of?this?chapter?are?as?follows. Page?2 BASICS OF LEASING Intermediate?Accounting Chapter?21 Study Obje

25、ctive Explain the nature, economic substance, and advantages of lease transactions. A?lease is?a?contractual?agreement?between?a?lessor and?a?lessee that?gives?the?lessee?the?right to?use?specific?property,?owned?by?the?lessor,?for?a?specified?period?of?time?in?return?for?stipulated, and?gen

26、erally?periodic,?cash?payments?(rents).?An?essential?element?of?the?lease?agreement?is that?the?lessor?conveys?less?than?the?total?interest?in?the?property. Because?a?lease?is?a?contract,?the?provisions?agreed?to?by?the?lessor?and?lessee?may?vary?widely and?may?be?limited?only?by?their?ingenuity.

27、?The?duration—lease term—of?the?lease?may?be anything?from?a?short?period?of?time?to?the?entire?expected?economic?life?of?the?asset.?The?rental payments may?be?level?from?year?to?year,?increasing?in?amount,?or?decreasing.?They?may?be predetermined?or?may?vary?with?sales,?the?prime?interest?rate,?the

28、?consumer?price?index,?or?some other?factor.?In?most?cases?the?rent?is?set?to?enable?the?lessor?to?recover?the?cost?of?the?asset?plus a?fair?return?over?the?life?of?the?lease. The?obligations for taxes, insurance, and maintenance (executory?costs)?may?be?assumed?by either?the?lessor?or?the?lessee

29、,?or?they?may?be?divided.?Restrictions comparable?to?bond?indentures may?limit?the?lessee's?activities?regarding?dividend?payments?or?the?incurrence?of?further?debt and?lease?obligations?in?order?to?protect?the?lessor?from?default?on?the?rents.?The?lease?contract may?be?noncancelable,?or?it?may?gran

30、t?the?right?to?early termination on?payment?of?a?set?scale of?prices?plus?a?penalty.?In?case?of?default,?the?lessee?may?be?liable?for?all?future?payments?at once,?receiving?title?to?the?property?in?exchange.?Alternatively,?in?case?of?default,?the?lessor?may have?the?right?to?sell?to?a?third?party?an

31、d?collect?from?the?lessee?all?or?a?portion?of?the?difference between?the?sale?price?and?the?lessor's?unrecovered?cost. Different treatments for the lessee at termination of?the?lease?may?range?from?none?to?the?right to?purchase?the?leased?asset?at?the?fair?market?value?or?the?right?to?renew?or?buy?a

32、t?a?nominal price. Advantages of Leasing Although?leasing?is?not?without?its?disadvantages,?the?growth?in?its?use?suggests?that?it?often?has a?genuine?advantage?over?owning?property.?Some?of?the?commonly?discussed?advantages?to?the lessee?of?leasing?are: 1. 100% Financing at Fixed Rates.

33、Leases?are?often?signed?without?requiring?any?money down?from?the?lessee,?which?helps?the?lessee?to?conserve?scarce?cash—an?especially desirable?feature?for?new?and?developing?companies.?In?addition,?lease?payments?often remain?fixed,?which?protects?the?lessee?against?inflation?and?increases?in?the?

34、cost?of Page?3 Intermediate?Accounting Chapter?21 money.?The?following?comment?regarding?a?conventional?loan?is?typical:?“Our?local bank?finally?came?up?to?80?percent?of?the?purchase?price?but?wouldn't?go?any?higher, and?they?wanted?a?floating?interest?rate.?We?just?couldn't?afford?the?d

35、own?payment and?we?needed?to?lock?in?a?final?payment?rate?we?knew?we?could?live?with.” 2. Protection against Obsolescence. Leasing?equipment?reduces?the?risk?of?obsolescence to?the?lessee,?and?in?many?cases?passes?the?risk?of?residual?value?to?the?lessor.?For example,?Merck (a?pharmaceutical?make

36、r)?leases?computers.?Merck?is?permitted?under the?lease?agreement?to?turn?in?an?old?computer?for?a?new?model?at?any?time,?canceling the?old?lease?and?writing?a?new?one.?The?cost?of?the?new?lease?is?added?to?the?balance due?on?the?old?lease,?less?the?old?computer's?trade-in?value.?As?one?treasurer?re

37、marked, “Our?instinct?is?to?purchase.”?But?if?a?new?computer?comes?along?in?a?short?time,?“then leasing?is?just?a?heck?of?a?lot?more?convenient?than?purchasing.” 3. Flexibility. Lease?agreements?may?contain?less?restrictive?provisions?than?other?debt agreements.?Innovative?lessors?can?tailor?a?l

38、ease?agreement?to?the?lessee's?special?needs. For?instance,?rental?payments?can?be?structured?to?meet?the?timing?of?cash?revenues generated?by?the?equipment?so?that?payments?are?made?when?the?equipment?is productive. 4. Less Costly Financing. Some?companies?find?leasing?cheaper?than?other?forms?o

39、f financing.?For?example,?start-up?companies?in?depressed?industries?or?companies?in low?tax?brackets?may?lease?as?a?way?of?claiming?tax?benefits?that?might?otherwise?be lost.?Depreciation?deductions?offer?no?benefit?to?companies?that?have?little,?if?any, taxable?income.?Through?leasing,?these?tax?b

40、enefits?are?used?by?the?leasing?companies or?financial?institutions,?which?can?pass?some?of?the?tax?benefits?back?to?the?user?of?the asset?in?the?form?of?lower?rental?payments. Some?companies?“double?dip”?on?the?international?level?too.?That?is,?the?leasing rules?of?the?lessor's?and?lessee's?co

41、untries?may?be?different,?permitting?both parties?to?be?an?owner?of?the?asset.?Thus,?both?lessor?and?lessee?receive?the?tax benefits?related?to?depreciation. 5. Tax Advantages. In?some?cases,?companies?can?“have?their?cake?and?eat?it?too.”?That is,?companies?do?not?report?an?asset?or?a?liabilit

42、y?for?the?lease?arrangement?for?financial reporting?purposes.?However,?for?tax?purposes,?the?asset?is?capitalized?and?depreciated. As?a?result,?the?company?takes?deductions?earlier?rather?than?later?and?also?saves?on its?taxes.?A?common?vehicle?for?this?type?transaction?is?a?“synthetic?lease”?arrang

43、ement. An?expanded?discussion?of?a?synthetic?lease?used?by?Krispy Kreme is?on?page?1098. 6. Off-Balance-Sheet Financing. Certain?leases?do?not?add?debt?on?a?balance?sheet?or affect?financial?ratios,?and?they?may?add?to?borrowing?capacity.2 Such?off-balance-sheet financing is?critical?to?some?comp

44、anies. Page?4 Intermediate?Accounting Chapter?21 O FF-BALANCE-SHEET FINANCING As?shown?in?our?opening?story,?the?airlines?use?lease?arrangements?extensively,?which?results in?a?great?deal?of?off-balance-sheet?financing.?The?following?chart?indicates?that?debt?levels are?understate

45、d?by?a?substantial?amount?for?many?airlines?that?lease?aircraft. Analysts?must?adjust?reported?debt?levels?for?the?effects?of?non-capitalized?leases.?For?example, the?estimates?for?additional?debt?in?the?chart?above?were?derived?by?taking?the?present?value of?each?airl

46、ine's?future?operating?lease?payments,?as?disclosed?in?the?lease?note?in?the company's?annual?report?(as?shown?in?Illustration?32). A?methodology?for?making?this?adjustment?is?discussed?in?Eugene?A.?Imhoff,?Jr.,?Robert?C. Lipe,?and?David?W.?Wright,?“Operating?Leases:?Impact?of?Constructive?Capita

47、lization,” Accounting Horizons (March?1991). Conceptual Nature of a Lease If?United Airlines borrows?$47?million?on?a?10-year?note?from?National?City?Bank?to?purchase a?Boeing?757?jet?plane,?it?is?clear?that?an?asset?and?related?liability?should?be?reported?on?United's balance?sheet?at?that?

48、amount.?If?United?purchases?the?757?for?$47,000,000?directly?from?Boeing through?an?installment?purchase?over?10?years,?it?is?equally?clear?that?an?asset?and?related?liability should?be?reported?(i.e.,?the?installment?transaction?should?be?“capitalized”).?However,?if?United leases the?Boeing?757?for

49、?10?years?through?a?noncancelable?lease?transaction?with?payments?of the?same?amount?as?the?installment?purchase?transaction,?differences?of?opinion?start?to?develop over?how?this?transaction?should?be?reported.?The?various?views?on?capitalization of leases are as?follows. 1. Do Not Capitalize An

50、y Leased Assets. In?this?view,?because?the?lessee?does?not?have ownership?of?the?property,?capitalization?is?considered?inappropriate.?Furthermore, a?lease?is?an?“executory” contract requiring?continuing?performance?by?both?parties. Because?other?executory?contracts?(such?as?purchase?commitments?and

51、?employment contracts)?are?not?capitalized?at?present,?leases?should?not?be?capitalized?either. Page?5 Intermediate?Accounting Chapter?21 2. Capitalize Leases That Are Similar to Installment Purchases. In?this?view,?transactions should?be?reported?in?accordance?with?their?economic?su

52、bstance.?Therefore,?if installment?purchases?are?capitalized,?so?also?should?leases?that?have?similar characteristics.?For?example,?United?Airlines?is?committed?to?the?same?payments?over a?10-year?period?for?either?a?lease?or?an?installment?purchase;?lessees?make?rental payments,?whereas?owners?make

53、?mortgage?payments.?Why?shouldn't?the?financial statements?report?these?transactions?in?the?same?manner? 3. Capitalize All Long-Term Leases. Under?this?approach,?the?only?requirement?for capitalization?is?the?long-term?right?to?use?the?property.?This?property-rights?approach capitalizes?all?long-

54、term?leases.3 4. Capitalize Firm Leases Where the Penalty for Nonperformance Is Substantial. A?final approach?is?to?capitalize?only?“firm”?(noncancelable)?contractual?rights?and?obligations. “Firm”?means?that?it?is?unlikely?that?performance?under?the?lease?can?be?avoided without?a?severe?penalty

55、.4 The?issue?of?how?to?report?leases?is?the?classic?case?of?substance?versus?form. Although?legal?title?does?not?technically?pass?in?lease?transactions,?the?benefits from?the?use?of?the?property?do?transfer. In?short,?the?various?viewpoints?range?from?no?capitalization?to?capitalization?of

56、?all?leases.?The FASB?apparently?agrees?with?the?capitalization?approach?when?the?lease?is?similar?to?an?installment purchase,?noting?that?a lease that transfers substantially all of the benefits and risks of property ownership should be capitalized.?Transfer?of?ownership?can?be?assumed?only?if?ther

57、e?is?a?high degree?of?performance?to?the?transfer—that?is,?if?the?lease?is?noncancelable.?Noncancelable means that?the?lease?contract?is?cancelable?only?upon?the?outcome?of?some?remote?contingency,?or?that the?cancellation?provisions?and?penalties?of?the?contract?are?so?costly?to?the?lessee?that?can

58、cellation probably?will?not?occur.?Only?noncancelable?leases?may?be?capitalized. This?viewpoint?leads?to?three?basic?conclusions:?(1)?The?characteristics?that?indicate?that substantially?all?of?the?benefits?and?risks?of?ownership?have?been?transferred?must?be?identified. (2)?The?same?characteris

59、tics?should?apply?consistently?to?the?lessee?and?the?lessor.?(3)?Those?leases that?do not transfer?substantially?all?the?benefits?and?risks?of?ownership?are?operating?leases. They?should?not?be?capitalized?but?rather?accounted?for?as?rental?payments?and?receipts. Page?6

60、 Intermediate?Accounting Chapter?21 ACCOUNTING BY LESSEE Study Objective Describe the accounting criteria and procedures for capitalizing leases by the lessee. If?a?lessee?capitalizes a?lease,?the?lessee records?an?asset?and?a?liability?generally?equal?to?the present?value?of?th

61、e?rental?payments.?The?lessor,?having?transferred?substantially?all?the?benefits and?risks?of?ownership,?recognizes?a?sale?by?removing?the?asset?from?the?balance?sheet?and replacing?it?with?a?receivable.?The?typical?journal?entries?for?the?lessee?and?the?lessor,?assuming equipment?is?leased?and?is?c

62、apitalized,?appear?as?follows. Journal Entries for Capitalized Lease Having?capitalized?the?asset,?the?lessee?records?the?depreciation.?The?lessor?and?lessee?treat?the lease?rental?payments?as?consisting?of?interest?and?principal. If?the?lease?is?not?capitalized,?no?asset?is?recorded?

63、by?the?lessee?and?no?asset?is?removed?from?the lessor's?books.?When?a?lease?payment?is?made,?the?lessee?records?rental?expense?and?the?lessor recognizes?rental?revenue. For?a?lease?to?be?recorded?as?a?capital lease,?the?lease?must?be?noncancelable?and?must?meet?one or?more?of?the?following?four?c

64、riteria. Capitalization Criteria for Lessee Leases?that?do not meet any of the four criteria are?classified?and?accounted?for?by?the?lessee?as operating leases.?Illustration?3?shows?that?a?lease?meeting?any?one?of?the?four?criteria?results?in the?lessee?having?a?capital?lease. P

65、age?7 Intermediate?Accounting Chapter?21 Diagram of Lessee's Criteria for Lease Classification In?keeping?with?the?FASB's?reasoning?that?a?significant?portion?of?the?value?of?the?asset?is consumed?in?the?first?75?percent?of?its?life,?neither?the?third?nor?the?fourth?criterion?is?to

66、?be?applied when?the?inception?of?the?lease?occurs?during?the?last?25?percent?of?the?life?of?the?asset. Capitalization Criteria The?four?capitalization criteria that?apply?to?lessees?are?controversial?and?can?be?difficult?to?apply in?practice.?They?are?discussed?in?detail?in?the?following?pages. Transfer of Ownership Test If?the?lease?transfers?ownership?of?the?asset?to?the?lessee,?it?is?a?capital?lease.?This?criterion?is?not controversial?and?is?easily?implemented?in?practice.