JARD-REF3-L-LEASES

-ADAMSON UNIVERSITY- Page 1 of 2

ACCOUNTING FOR LEASES

LEASEAn agreement whereby a lessor conveys to the lessee, in returnfor payments or series of payments, the right to use an assetfor an agreed period of time.

FINANCE LEASE (BPOL) Bargain purchase option

The lessee has the option to purchase the asset at a pricewhich is expected to be sufficiently lower than the fairvalue at the date the option becomes exercisable suchthat, at the inception of the lease, it is reasonably certainthat the option will be exercised.

Present value of minimum lease paymentsAt the inception of the lease, the present value of theminimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset,whether or not title will pass to the lessee.

Ownership transferredOwnership of leased property to the lessee at the end ofthe lease term.

Lease termThe lease term is for the major part of the economic life ofthe leased property even if title is not transferred.

OPERATING LEASE - Lessors and Lessees Viewpoint Accounted for by both parties as a simple rent agreement.

The lessor records the rentals received as rent revenuewhereas the lessee records the rental paid as rentexpense.

termLeasepayments lease Total comeExpense/InRent Annual

Initial direct costs incurred by the lessor are added to thecarrying amount of the leased asset and recognized asexpense over the lease term.

Depreciation of the property is recognized by the lessor. Executory costs are charged to expense or to a regular

expense account. Contingent rentals are added to the rent revenue/expense

in the period in which they arise.

Lessees BooksRent Expense xx

Cash xxRent Payable xx

Lessors BooksCash xxRent Receivable xx

Rent Income xx

FINANCE LEASE - Lessees Viewpoint Accounted for as a purchase on a deferred payment

contract. An asset and a liability are recognized at the dateof lease commencement.

Cost assigned to the leased asset is the present value ofthe minimum lease payments. Capitalized cost of theleased asset should not exceed its fair value at theinception of the lease.

The lessee computes the present value of MLP using theinterest rate implicit in the lease; if this is practicable todetermine; otherwise, the lessees incremental borrowingrate should be used.

Inception of the LeaseLeased Equipment xx

Finance Lease Obligation xx

Subsequent PaymentInterest Expense xxFinance Lease Obligation xx

Cash xx

Depreciation of the leased property is recorded andcomputed as follows: Based on the economic life; if there is reasonable

certainty that ownership will be transferred by theend of the lease term.

Based on the shorter of the lease term or its usefullife, if there is no reasonable certainty that the lesseewill obtain ownership at the end of the lease term.

Exercise of Bargain Purchase OptionEquipment xxAccum. Depreciation - Leased Equipment xx

Leased Equipment xxCash xx

If unexercisedLoss on Finance Lease xxAccum. Depreciation - Leased Equipment xx

Leased Equipment xx

JARD-REF3-L-LEASES

-ADAMSON UNIVERSITY- Page 2 of 2

FINANCE LEASE - Lessors Viewpoint

Manufacturers/ Dealers Lease Lessor is a manufacturer or dealer which uses leases as a

means of selling its products. Lessor recognizes two types of revenue:

Manufacturers or dealers profit - gross profit Interest income

Finance Lease Receivable xxSales xxUnearned Interest Revenue xx

Cost of Goods Sold** xxUnearned Interest Revenue* xx

Inventory xx* = Present Value of Unguaranteed Residual Value** = Use the account as Balancing Figure

Direct Financing Lease Lessor is a financing company which acquires the asset

specifically for leasing. Lessor only recognizes only one type of revenue, that is

interest revenue.

Finance Lease Receivable xxAsset Purchased for Lease xxUnearned Interest Revenue xx