Answered: Explain the accounting for finance…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Explain the accounting for finance leases.

Expert Solution

Step 1

A lessee should categorize a lease as a finance lease when any of the following criteria are met:

Ownership of the underlying asset is shifted to the lessee by the end of the lease term.
The lessee has a purchase option to buy the leased asset, and is reasonably certain to use it.
The lease term covers the major part of the underlying asset’s remaining economic life. This is considered to be 75% or more of the remaining economic life of the underlying asset.
The present value of the sum of all lease payments and any lessee-guaranteed residual value matches or exceeds the fair value of the underlying asset.
The asset is so specialized that it has no alternative use for the lessor following the lease term.

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