CLFP EXAM - Financial and Tax Accounting for Leases

Are "net leases" treated differently from tax perspective? - Some lessor believe that they can delegate tax liability to the lessee via their lease agreement. Most government agencies don't agree. Describe a key element to understanding a balance sheet. - 1.) Assets - Liabilities = Equity 2.) any increase or decrease on one side of the equation always creates a corresponding entry on the other side of the equation How can financial statements be used to manage? - 1.) Review statements over different periods of time can help management to see trends, strengths and weaknesses. 2.) Reviewing financial statements over longer period time, underwriters can better assess credit risk. How did APB (Accounting Principals Board) fail? - Created Opinion #5 (Reporting of Leases in Financial Statements of Lessees) and Opinion #7 (Accounting for Leases in Financial Statements for Lessors) that ha different opinions and left lessors & lessees with conflicting rules. 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 Depreciation Calculated? - Apportioning an assets original value, less any expected salvage value, over the expected useful life. How is Depreciation reflected on financial statements? - 1.) income statement - reflected as an expense 2.) balance sheet - reflected as book value (carrying cost) 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 is Lessor's Tax Treatment different if a lease DOES NOT pass "burden of proof"? - Would be considered a sale, not a lease and the lessor would realize rental income to the extent of the total lease payments exceed the equipment cost. Interest is amortized of the the life of lease. How is Lessor's Tax Treatment different if a lease DOES pass "burden of proof"? - Treated as True Lease. Rental payments are recognized as income and the leased