Active TopicsActive Topics  Display List of Forum MembersMemberlist  Search The ForumSearch  HelpHelp
  RegisterRegister  LoginLogin
FAR STUDY GROUP
 CPAnet Forum : FAR STUDY GROUP
Subject Topic: Capital lease - depreciation - lessee (Topic Closed Topic Closed) Post ReplyPost New Topic
  
Author
Message << Prev Topic | Next Topic >>
divyagovil1
Major Contributor
Major Contributor
Avatar

Joined: 30 Jan 2009
Location: India
Online Status: Offline
Posts: 1456
Posted: 07 Apr 2009 at 13:59 | IP Logged  

Douglas Co. leased machinery with an economic useful life of six years. For tax purposes, the depreciable life is seven years. The lease is for five years, and Douglas can purchase the machinery at fair value at the end of the lease. What is the depreciable life of the leased machinery for financial reporting?

Answer :- 5 years

Addl. explanation :- Assets acquired under capital lease are depreciated using the same theory as purchased assets. The purchase option is for " fair value." It is not a "bargain purchase option" therefore the assumption cannot be made that Douglas Co. will acquire the machine at the end of the lease period. At the inception of the lease, the best estimate of economic life to Douglas is the five-year lease term.

Can someone pls explain the following statement ":-

"The purchase option is for " fair value." How can we say that it's not the first option "Ownership transfers at the end of lease(upon final payment or required buyout)?

Thanks!



__________________
Divya - CO State

Passed using Becker Review :
FAR - 04/11/09 - 94
BEC - 05/30/09 - 86
REG - 08/29/09 - 95
AUD - 11/21/09 - 92
Ethics - 2011
Back to Top View divyagovil1's Profile Search for other posts by divyagovil1 Visit divyagovil1's Homepage
 
cinnamon
Major Contributor
Major Contributor


Joined: 12 Aug 2008
Online Status: Offline
Posts: 312
Posted: 07 Apr 2009 at 14:37 | IP Logged  

This lease is a capital lease unde the ownS test (75% or more of economic life is leased).

Thus the lease life of 5 years should be used.

As you have correctly identified there is no bargain option. In addition, it is not a required buyout, it is an optional buyout (it is not required from Douglas to acquire the property). I'll take it one step further: if the question asked you "what is the PV of the lease at inception given that Douglas can purchase the machine at 100,000(FV)?" Would you include the 100,000 in the PV calculations? No, because it is an optional buyout.

 

Back to Top View cinnamon's Profile Search for other posts by cinnamon
 
divyagovil1
Major Contributor
Major Contributor
Avatar

Joined: 30 Jan 2009
Location: India
Online Status: Offline
Posts: 1456
Posted: 07 Apr 2009 at 14:50 | IP Logged  

Alright, I get it now..... Optional buy out... How can I be so dumb ? :)

Thanks a lot,cinnamon !



__________________
Divya - CO State

Passed using Becker Review :
FAR - 04/11/09 - 94
BEC - 05/30/09 - 86
REG - 08/29/09 - 95
AUD - 11/21/09 - 92
Ethics - 2011
Back to Top View divyagovil1's Profile Search for other posts by divyagovil1 Visit divyagovil1's Homepage
 



Sorry, you can NOT post a reply.
This topic is closed.


  Post ReplyPost New Topic
Printable version Printable version

Forum Jump
You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot delete your posts in this forum
You cannot edit your posts in this forum
You cannot create polls in this forum
You cannot vote in polls in this forum

Powered by Web Wiz Forums version 7.9
Copyright ©2001-2010 Web Wiz Guide

This page was generated in 0.0781 seconds.

Copyright 1996-2016 CPAnet/MizWeb Communities All Rights Reserved
Twitter
|Facebook |CPA Exam Club | About | Contact | Newsletter | Advertise & Promote