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Financial Accounting and Reporting/Blueprint/3.F

Lessee accounting

Area 3: Select Transactions (25-35%)

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Topics

  • Lease classification (operating vs. finance)
  • Right-of-use assets and lease liabilities
  • Lease cost recognition

Lessons

  • Lessee AccountingFree

Study Frameworks

Lease Classification (ASC 842)

Lease Accounting
Lessee
Finance Lease
ROU asset + lease liability
Amortization + interest expense
Front-loaded expense pattern
Operating Lease
ROU asset + lease liability
Single straight-line lease expense
Lessor
Sales-type
Direct financing
Operating

NFP Net Asset Classification

Net Assets (ASC 958)
Without Donor Restrictions
Board-designated (internally restricted)
Undesignated (fully available)
With Donor Restrictions
Purpose restrictions
Time restrictions
Perpetual (endowments)
Principal maintained permanently

Lease Classification (Lessee — ASC 842)

Does the lease transfer ownership to the lessee by the end of the lease term?
Yes
Finance lease
No
Does the lease contain a purchase option the lessee is reasonably certain to exercise?
Yes
Finance lease
No
Is the lease term for the major part (≥75%) of the asset's remaining economic life?
Yes
Finance lease
No
Is the present value of lease payments ≥ substantially all (≥90%) of the asset's fair value?
Yes
Finance lease
No
Operating lease

Sale-Leaseback Classification

Does the transfer of the asset qualify as a sale under ASC 606 (control transferred)?
Yes
Is the leaseback classified as a finance lease?
Yes
Not a sale — record as financing obligation (failed sale-leaseback)
No
Sale recognized — derecognize asset, record ROU asset and lease liability; recognize gain only on rights transferred to buyer
No
Not a sale — record cash received as financing obligation; seller keeps asset on books

Right-of-Use Asset (Initial)

Lease Liability + Initial Direct Costs + Prepaid Lease Payments − Lease Incentives

Lessor Lease Classification (ASC 842)

FeatureSales-TypeDirect FinancingOperating
Asset derecognizedYesYesNo
Selling profitImmediateDeferredN/A
Selling lossImmediateImmediateN/A
Income patternInterest (front-loaded)Interest (front-loaded)Straight-line
DepreciationN/A (asset derecognized)N/ALessor depreciates
OWES LIFEOwnership transfer, Written purchase option, Economic life ≥75%, Substantially all FV ≥90%, Lessee — If any of the First Four apply → finance, Else → operating

ASC 842 lessee lease classification criteria. If the lessee OWES LIFE, it's a finance lease.

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