Free Cheat Sheet Included! Master Lease Accounting for the CPA Exam | Maxwell CPA Review
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- เผยแพร่เมื่อ 5 ส.ค. 2024
- This video by Kyle Ashcraft of Maxwell CPA Review covers everything you need to know about accounting for leases on the CPA Exam. You'll learn how to distinguish between finance leases and operating leases, and how to record the journal entries for each type of lease. This is a great resource for CPA exam takers looking to master lease accounting. In the video, Kyle also offers private online tutoring for the CPA Exams. You can visit maxwellcpareview.com for more information.
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Learn about the differences between finance and operating leases, along with the journal entries needed for each type of lease. In this video, I walk students through a full example of lease accounting, including the journal entries from start to finish.
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Video Chapters:
0:00 - Intro
0:31 - Distinguishing Between Finance Lease vs Operating Lease
2:13 - What Happens Throughout the Life of a Lease
3:06 - Finance Lease Example
10:40 - Operating Lease Example
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Thank you so much, this was so easy to understand and follow!
I really appreciate that!
You need to redo the Operating Lease slides. The "plug" entry for the Right of Use Asset should be a CREDIT. It needs to REDUCE the debit balance for ROA on the balance sheet.
Good call, the ROU Asset should indeed be credited instead of debited. Thanks for helping me to see this.
You should really redo this video chief if I didn’t see this comment I’d be maaaad confused rn
@@jmay5354Chief?? I think you meant Mr. Ashcraft.
Thank you very much for making it so easy to understand!
this video really helped me, thanks a lot! I really appreciate your content, keep it up!
When recording the Operating Lease, the Right of Use entry should be a credit instead of a debit. Thank you for this clear and concise explanation of how to record the different leases.
Hello Jeanie, thanks for reaching out! The Right of Use entry has to be a debit because it’s essentially a fixed asset. Then you have the credit to record the Lease Liability.
@@MaxwellCPAreview I believe what jeannie is referring to is the postings after the initial entry. in your video they are under the debit column but should be a plug figure within the credit side so as to write down the ROU asset to zero. Great video.
^^^^ @maxwell CPA Review
This one confused me too for a while...then I remembered reading your comment
@@MaxwellCPAreviewyes but the subsequent entry should reduce the asset. Otherwise your entry doesn’t balance.
This was extremely helpful! Thank you for sharing.
Thank you so much for letting me know! Best of luck in your studies.
This Video safed my life in my Financial Accounting exam ❤️
That is so encouraging to hear! Thanks so much!
Great video, it was very easy to follow!
Thank you, Navaneet! I am so glad to hear, thank you for letting me know!
In operating lease 2nd journal entries, right to use account has to be credited so eventually at the end of lease it becomes zero, however in the video it is being debited
Hello Sridhar, thanks for reaching out! Are you referring to the summary chart of all the entries? I accidentally swapped the debits and credits there. Thanks for commenting!
Sridhar is referring to the third line in the shot at ~11:20, debiting instead of crediting ROU.
Thank you so much for this wonderful topic.
Thank you for kind feedback!
Thanks for the vid! The process and/or nomenclature of accounting for the operating lease is a bit obtuse. Namely that we're crediting the lease liability an amount equivalent to the effective interest ($124,500 * 10%) and then debiting the least liability $50,000. I don't understand why. We can get the same result and account balances with a less ambiguous approach.
Credit: Cash $50,000 | Debit: Interest Expense $12,450, Debit: Lease liability $37,550
Debit: Amortization of ROU $37,550 | Credit: ROU Asset $37,550
The Lease liability and ROU Asset carrying values work out to be the same , and the Interest Expense + Amortization of ROU expense is equivalent to lease expense on the earnings sheet.
an insta subscribe, i was trying to look for this explanation showing the difference in calculation for the asc 842 for both operation and finance leases but couldn't find it in youtube. your explanation and example were both simple. Thanks a lot
That is so kind of you, Sagar! I am so glad that it helped out. I struggled initially to find the differences between them too, which is why I wanted to make this video.
Thank YOU SO MUCH!! Keep forgetting about lease accounting
You're welcome!
Great video, so essentially, the answer is 45,645. As year 1 starts on day 1 of the lease term.
Thanks Elizabeth! Yes, that's correct!
thanks for making easy to understand
Hello Hung, I'm so glad the video helped! That's my main goal, to make these accounting concepts as clear as possible. Thanks for reaching out.
Great video ,thanks
Thank you!
Thank you!
Does the decrease in ROU ALWAYS equal to the decrease in Lease liability every year? In what situation would they be different?
Thank you for share
Would appreciate if you can provide lessor accounting impact as well and the other aspects like lease termination/ payoffs.
Hi Kyle, how do you record lease agreement for office space under the new requirement ASC 842 if you do not have interest rate, implicit rate-- just the term of the lease 3yrs, and monthly payment (8,000) with 10% increase if the lessee want to renew the lease.
How to determine in this case implicit rate if I only have this information for the lease agreement???
Amazing video! Can you please a criteria testing in spreadsheet to show us the whole process and how it should be disclosed? 2:35 also on 11:49 can you please create the complete journal entries? Is expense debited and credited to lease liability? Just want to confirm 😅
Why don’t you take the first lease payment at lease commencement? Shouldn’t the year 2 journal entry be an interest expense of 10% * (124,500-50,000) = 74,500? Where 50,000 was the amount paid at lease commencement. Interest is not taken at year 1 since interest expense only occur with the passage of time, but I’m pretty sure the first lease payment is made at lease commencement and so the lease liability will reduce by the full $50,000
Hi Gabriella, that's a great question. If the question stated, "The lessee makes the first payment upon starting the lease" then absolutely that would be the case. In this question, since it doesn't state making a payment right at the beginning, then we don't need to decrease the lease liability by $50,000 right away. Thanks!
Great video! However the 2nd JE on the operating lease had me so confused for a few minutes! Haha the devil's in the details in our field isn't it? Love your content though, this definitely gave a simple and concise explanation of ASC 842.
Hi Carla! Ah yes, I totally flipped around the entry when I show the summary of it. I wish I could edit that part of the video but TH-cam doesn’t let you. I will put a caption over that part that clarifies the error. I’m so glad the video helped you understand lease accounting a little better! - Kyle
@@MaxwellCPAreview Couldn't you just simply re-upload the video? 😛 Come on man.... it's a CPA review course.
Thankyou so much
You are very welcome!
Why the Right to use asset is amortized by the lessee over the life of assets instead of lease term. The lessee won't have any lease liability or right to use after 3 years.. right? pls explain?
In operating lease calculation. the 3 year ROU plug ins does not equal $124500 to totally wipe out the ROU account. Can you explain why the difference?
Hey can you provide more questions on lease
Hi, thank you for this thorough lecture. Why was the Lease Liability credited against the Interest Expense? Isn't the Interest Expense supposed to be paid in Cash to the Lessor?
Hi Hala, the lease liability increases by interest expense and decreases with the cash payment. Keep in mind those two effects on it.
Hi. Can you please throw some light on where is deferred rent reflected under ASC 842?
My understanding is that deferred rent would be recorded within the carrying value of the lease (lease liability).
can you explain “payments on capital lease” in cash flow statement
That's for the "principal" portion of the finance lease. Not the interest portion.
ROU asset should get credited during Y2,3 and 4 with the plug amount, right.. why are you showing debited
You are correct, the ROU Asset should be credited throughout its life. The debit is simply an error.
Is Sales tax on the lease payment a current expense, or is it supposed to be capitalized?
Good question. I believe it depends on whether the sales tax is included in the lease payment amount, in which case it would be capitalized. If it's not included in the payment, then it can be directly expensed.
How do we account for Vat on finace lease ?
This video is specific to US leases, which do not have any VAT tax.
operating lease, your numbers of both ROU asset and Liabilities won't be zero at the end of year 4. There is $210 left. what is the reason?
Good catch. This is just due to a rounding error because when I found the present value I rounded the PV factor.
@@MaxwellCPAreview Yep I tried to calculate the initial lease liability with the PV formula in excel and it resulted in zero at the end. Formula is =PV(10%,3,50000) This equals $124,342.60
Can cash paid be different than lease expense?
Yes, for an operating lease it could be different, if you are giving incentives such as free months during the lease. This would cause the two to be different.
How do we account for the lease expense in I.S
Lease expense would be in the G&A Expenses.
What if am given direct costs in the question? How do I treat them
Direct costs are not used in calculating the pv of the right of use asset, they are expensed.
Correct, you directly expense the direct costs. The lease liability is focused solely on the present value of the lease payments.
I see a carrying value of $209.50 on end of 4th year. Carrying value at end of 3rd Year $45,645+$4,564-$50,000=$209.50. Why is that?
Similar carrying value with mine too
You are absolutely right. I did the same and got the same results. Also, the reduction method is better in terms of entry and calculation of the ending Lease Liability. To illustrate, at the end of Year 2, the entry will be
Dr. Interest Expense 12,450
Dr. Lease Liability 37,350 (difference between the annual payment (50,000 -12,4500)
Cr. Cash 50,000
Then it is easy to get the ending carrying value of the Lease Liability= 124,500-37,350= $86,950. We used only one entry and saved time.
Hi Kyle, good video, however, your entries for operating lease do not balance, asset reduction is on incorrect side, Dr.
Hi Alex, you make an excellent point! I see what you're saying, the debits are where the credits should be. Thank you so much for helping me to see this!
Why is Becker not this simple?
On the second operating example you are incorrect on the entries.. Not a great way to explain how to do the problem.
Hey Roby, thanks for the comment! That is correct, the right of use asset should be credited instead of debited. Thanks for watching!
I think, the ROU amortization amount for finance lease is not correct, it should be 41500.
When the title is expected to be transferred, the leased asset is depreciated over its useful life instead of the lease term.
Great video. Question for you if you don't mind: What if there is a pre payment at commencement, for let's say 3 months? When would you start amortizing the lease liability? Would it be in month 4?
Thank you, Charles! Great question. For an operating lease, the lease expense is the total payments evenly divided. So even though you pay for 3 months at the beginning, your expense would be for a lower amount.
0:48
You need to take this down until you can get your debits and credits in the correct column. Too confusing for those seeking guidance.
Fr though this confused me so hard for the operating leases section!!