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CHAPTER 15 Leases 865 DEPRECIATION PERIOD. The lessee normally should depreciate a leased asset over the term of the lease. However, if ownership transfers or a bargain purchase option is present (i.e., either of the first two classification criteria is met), the asset should be depreciated over its useful life. This means depreciation is recorded over the useful life of the asset to the lessee whether or not that useful life is limited by the term of the lease. A description of leased assets and related depreciation provided in a recent disclosure note ( Illustration 15–7 ) of Kroger Company is representative of leased asset disclosures. Because a capital lease assumes the lessee purchased the asset, the lessee depreciates its cost. The depreciation period is restricted to the lease term unless the lease provides for transfer of title or a BPO. End of Each Year Sans Serif Publishers, Inc. (Lessee) Depreciation expense ($479,079 ÷ 6 years*) ........................................ 79,847 Accumulated depreciation ............................................................. 79,847 *If the lessee depreciates assets by the straight-line method. Accrued Interest If a company’s reporting period ends at any time between payment dates, it’s necessary to record (as an adjusting entry) any interest that has accrued since interest was last recorded. We purposely avoided this step in the previous illustration by assuming that the lease agreement specified rental payments on December 31—the end of the reporting period. But if payments were made on another date, or if the company’s fiscal year ended on a date other than December 31, accrued interest would be recorded prior to preparing financial statements. For example, if lease payments were made on January 1 of each year, the effective interest amounts shown in the lease amortization schedule still would be appropriate but would be recorded one day prior to the actual rental payment. For instance, the second cash payment of $100,000 would occur on January 1, 2017, but the interest component of that payment ($37,908) would be accrued a day earlier as shown in Illustration 15–6C . Notice that this is consistent with recording accrued interest on any debt, whether in the form of a note, a bond, or a lease. We assumed in this illustration that First LeaseCorp bought the equipment for $479,079 and then leased it for the same price. There was no profit on the “sale” itself. The only income derived by the lessor was interest revenue recognized over the lease term. In effect, First LeaseCorp financed the purchase of the equipment by Sans Serif Publishers. This type of lease is a direct financing lease. This kind of leasing is a thriving industry. It is a profitable part of operations for banks and other financial institutions ( Citicorp is one of the largest). Some leasing companies do nothing else. Often leasing companies, like IBM Credit Corporation, are subsidiaries of larger corporations, formed for the sole purpose of conducting financing activities for their parent corporations. Illustration 15–7 Disclosure of Leased Assets—Kroger Company At each financial statement date, any interest that has accrued since interest was last recorded must be accrued for all liabilities and receivables, including those relating to leases. 3. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment, net consists of: $ in millions Feb. 1, 2014 Feb. 2, 2013 Land $ 2,639 $ 2,450 Buildings and land improvements 8,848 8,249 Equipment 11,037 10,267 Leasehold improvements 7,644 6,545 Construction-in-progress 1,520 1,239 Leased property under capital leases and financing obligations 691 593 Total property, plant and equipment 32,379 29,343 Accumulated depreciation and amortization (15,486) (14,495) Property, plant and equipment, net $ 16,893 $ 14,848 Accumulated depreciation for leased property under capital leases was $339 at February 1, 2014, and $321 at February 2, 2013. Real World Financials


Spiceland_Inter_Accounting8e_Ch15
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