[joe35y]

I am doing my final review for my FAR exam in a week. So i am going through all the MC questions again and reviewing my note-cards. I got this one question wrong pertaining to leases and am wondering why they did not include the guaranteed residual value into the recording of the capital lease? Is it because it was from a third party and not the lessee?

Here is a picture of the Becker Review problem

https://i.imgur.com/C23iP.png

REG - 79
FAR - 81
BEC - 84
Aud - 85

I'm a CPA!

[Peanut]

Just an FYI that material has a copyright. If you just type out the question I'm pretty sure it's okay, but I think if you post the actual picture Jeff might deleting it. Just giving you a heads up! Sorry I can't answer your question FAR is a distant memory 🙁

AUD 81 (X4) Previous scores 59, 72, 72
REG 80 (X3) Previous scores 59, 60
FAR 75 (X2) Previous score 67
BEC 79 (X2) Previous score 58

[ScruffMcGruff]

It's because the residual value is guaranteed. Look over pages F5-20 and 21. Gross and Net Investments for the lessor are calculated as:

Lease Payment + Un-Guaranteed Residual Value = Gross Investment

Gross Investment x PV Factor = Net Investment

… So basically just remember if its a Capital Lease and the residual value is ‘guaranteed' by someone, you would NOT use that amount to calculate the PV of the sale.

Edit: I also assume you knew before I typed this out that it was in fact a Capital Lease for the lessor. It meets the ‘S' of the ‘OWNS' requirement (75% or more of the economic life of the asset is used by the lessee). It doesn't mention the ‘U' or ‘C' of the ‘LUC' requirement that's specific to the lessor for Capital Leases, so just assume that it would.

AUD - 85
FAR - 78 (lol@ FAR Sims)
REG - 85
BEC - August

[joe35y]

Yes I understand all of that. However isn't Day considered the lessee in this problem? And as the lessee the guaranteed residual value should be capitalized under a Capital lease as shown in F5 Pg. 13?

REG - 79
FAR - 81
BEC - 84
Aud - 85

I'm a CPA!

[ScruffMcGruff]

Reading is hard! Ya, I messed up there…

I think you're right though, it's because Day (the lessee!) isn't required to make the payment, someone else is. On F5-13 it says: “The guaranteed residual value is the amount guaranteed BY THE LESSEE to the lessor for the estimated residual value…”

Basically what I think its trying to get at is that since YOU aren't paying for the cost of the residual value, it will not enter in as a cost for capitalizing the asset when you buy/lease it from the lessor.

AUD - 85
FAR - 78 (lol@ FAR Sims)
REG - 85
BEC - August

[Author]

Replies