 Hello and welcome to this session, this is Professor Farhad in which we will discuss few miscellaneous items that deals with accounting for leases. Specifically, we're gonna be dealing with depreciation expense when it comes to leases, amortization, the right of use asset for the less C and obviously the depreciation expense will be for the less SOAR. I will also discuss accounting for leases when it comes to bargain purchase option. Let's start with depreciation expense from the less SOAR's perspective. Remember, the less SOAR could have a sales lease, a sales type lease or a finance lease could have a direct finance lease and could also have an operating lease. Those are the three type of leases. Now, here's what you have to remember. Only if we have an operating lease, the less SOAR will depreciate the asset. Why? Because under the sales type lease and under the direct finance lease, we remove the asset. The less SOAR remove the asset. So if you don't have the asset, you are not going to depreciate the asset if you don't have it. Under an operating lease, no sale took place. So you still have the asset. The asset is on the books. You did not deregognize the asset. Well, what would you do under those circumstances? Well, if you have the asset, go ahead and depreciate the asset under an acceptable method. It doesn't matter whether you are using the straight line, the double declining, the sums of years digit, you depreciate the asset. So that's why the less SOAR issue is pretty straightforward when it comes to depreciation expense. Let's summarize. It has to be an operating lease and you would use your regular depreciation method. Now, before we proceed any further talking about depreciation for leases, most likely you are a student or a CPA candidate. You have arrived. Most likely you are watching because you need some help. Go to farhatlectures.com where I have additional resources, multiple choice, true, false, exercises that's going to help you do better on your CPA exam as well as your accounting courses. Don't hesitate. Invest in yourself. It's going to pay you dividend down the road. Connect with me on LinkedIn. If you haven't done so, like this recording, share it with other connect with me on Instagram, Facebook, Twitter and Reddit. Now, let's take a look at the less C. Remember, the less C will have the amortization, the right of use asset. Remember, when the less C starts commence the leases, they will debit right of use asset, which is an asset, right of use asset, and they will credit a liability. They will credit a liability. Now, the question is how long do we amortize the right of use asset? Well, you usually use the straight line. That's the method. But for how long? That's the question. And here we are dealing again with an operating lease from the less C's perspective. Now, remember, also remember that when we are dealing with an operating lease, we only have one expense and that's called lease expense. So you don't see amortization expense because remember, the lease expense will include both the interest component and the amortization. And this is what we talked about. This is what we talked about when we talked about operating leases, interest and amortization. It's one expense. Now, here's what I'm going to have to tell you. There's this general rule because certain CPA review courses, they would say there is more than one way to depreciate the lease. So I'm going to give you the general rule and give you the most common method. If there's no reasonable certainty that the less C will obtain ownership of the least asset, simply put, in other words, the less C will not have ownership. So the less C will not have ownership. The less C will not have that bargain purchase option. You remember those first two tests. If the first two tests are likely not met and they're likely not met at an operating lease, under those circumstances, we amortize the asset using the shorter of the lease term or the useful life, the shorter of these two. So compare these two and choose the shorter of the two. Again, as long as there is no reasonable certainty that the less C, the renter will obtain the asset at the end of the useful life. If they do obtain it at the end of the lease life, then you would use the useful life because technically they own the asset. But keep it simple. As long as it fails the first two tests, this is the amortization. And usually they don't challenge you more than that on the exam. But again, inserting CPA review courses, they separate between the two. So I'm giving you the general rule to follow. Now logically, the lease term should be less than the useful life. So if an asset should last five years, you don't lease it for seven, but it doesn't matter, follow the rule, the shorter of the lease term or the useful life. So let's assume the useful life of seven F is seven years, the lease term is seven years, you have an asset you put on the books for 21,000, the amortization expense of the lease expense component is 21,000, not 21,000 divided by seven is 3000. Let's assume the useful life is three years, the lease term is five, which is not usual, not usual. Okay. And let's assume we have a right of use asset of 21,000. Here we'll take 21,000 divided by three. And the amortization expense as part of the lease expense is 7,000, the shorter of the useful life or the lease term. Now let's talk about the bargain purchase option, BPO. And again, this is the last C will have to worry about this, because the last C will have this option whether they want to buy it. Now what is that? What is that bargain purchase option? Now if you watch The Godfather, you know what I'm going to say, you know, an offer you cannot refuse. Okay. So an offer so good that you cannot refuse. And I'm sure you can relate if you are a fan of The Godfather or if you ever watch The Godfather. So what would you do with this PBO? Well, you would include in the computation of the lease liability if it's a true bargain purchase option. What is a true bargain purchase option? It means so the value they're offering you, a deep discount that no reasonable person will say no to it. So let's assume a lease payment of 10,000 due on January 1st of every year for three years, assume 6% and this is an ordinary annuity. So no payment is due now. The value of the asset after three years is 4,000. This is what we are giving. Okay. So and the bargain purchase option is 500. So here's what we're telling you here. You're going to lease an asset. Let's assume it's a car. And after three years, the value of this car should be 4,000. But guess what? You can buy it for 500. I think any reasonable person will buy it for 500. Now how do we compute the present value of this liability? Well, we're going to take 10,000 times the present value of an ordinary annuity n equal to 3i equal to 6, which is 2.67301 from the time value table. So this is the present value of the payment, plus the present value of the 500, discounted of the present value of a single sum, a dollar, n equal to 3i equal to 6. The factor is 0.79209, which is $391.05. The lease liability will be the total of these two, $27,111.15. What should you do now? Go to far hat lectures and solve MCQs and true, false, and exercises and look at additional resources to learn this concept. Don't shortchange yourself. Your accounting career is important. It will pay dividend for you down the road. Good luck, study hard, and of course, stay safe.