Question

The lease payments for the company car, used mainly by the VP of sales for visiting clients, are incorrectly recorded under Vehicles—Leased. The monthly payments are $400 and began on May 1, 2019, for a three-year lease. (Note: only the first 10 months of payments had been made by March 31, 2020.) If PHL had purchased the car, it would have cost $30,000. The car has an expected useful life of six years.

The companies year end is March 30 2020.

In accordance with ASPE, is this transaction properly recorded? If yes please explain how. If no, please explain why its wrong and how to fix it.

Answer 1

Determining Type of Lease:

Going by the information provided above none of the conditions of Capital Lease are met i.e.(ASPE 3065)

1. No reasonable assurance the lessee will obtain ownership at end of lease.

2. Lease term is not equal to >= 75% of economic life of asset

3. Present Value (PV) of the minimum lease payments is 90% or more of the Fair Value (FV) of the leased property

Therefore this is a case of OPERATING LEASE

Accounting In Lessor Books:

• The asset remains on the lessor’s books at cost, less depreciation, as is standard.

• Revenue from the lease should be recognized in the Income Statement on a straight-line basis, mirroring the lessee’s books, over the term of the lease.

• Costs associated with leasing, such as maintenance, insurance and property taxes, etc… are written as expenses, and not netted from the lease payments received