(a) Operating Lease: An operating lease refers to an agreement between the lessor and lessee to transfer the right to use an asset temporarily. For example lease a car. Capital Lease: A capital lease refers an agreement in which lessee pays installments to the lessor periodically to use a particular asset. The ownership of the asset is transferred to the lessee, after the maturity of the agreement. To determine: The operating lease or capital lease among the three Explanation: Company J gives the computer on capital lease to Company R. Company H and Company G gives the equipment and automobile on operating lease to Company R. Description: To identify the lease, which is capital lease and which is operating lease, there is a criteria and which of the lease agreement fulfill one of these criteria would be considered as capital lease else operating lease. The four criteria to identify the capital lease and operating lease are as follows: Title transfer provision: The lessor transfers the property to lessee when the lease period ends. Bargain purchases provision: The marker value of the lease is higher than the purchase agreement. Economic life provision: The property has the 75% or more economic life than its useful life. Value recovery provision: More than 90% or equals to the property’s market value is the present value of lease payment. Company H and Company G is not considered as the transferee of capital lease because these don’t fulfill anyone of the criteria among four. Company J is considered as the transferee of capital lease as it fulfills these criteria: The property has the economic life of 7 years and useful life of 6 years. The useful life of the lease is more than the 75% of economic life. The property’s fair value is Conclusion: Company J delivers the capital lease and Company H and Company G delivers operating lease to Company R. (b) To determine: the transaction for lease agreement in the books of Company H. Explanation: Journal entry in the books of Company H for the lease agreement Date Account Title and Explanation Post Ref. Amount ($) Amount ($) Equipment Rent Expense 4,200 Cash 4,200 (To the payment of lease has been made ) Equipment rent expense is an expense for the company and it increases the expense account. Hence, equipment rent expense account will be debited. Cash is an asset for the company and at the time of payment it decreases the assets account. Hence, the cash account is credited. Conclusion: Hence, equipment rent expense account is debited and cash account is credited. (c) To determine: the lease agreement transaction in the books of Company J. Explanation: Journal entry in the books of Company J for the lease agreement Date Account Title and Explanation Post Ref. Amount ($) Amount ($) January 1 Lease Asset-Equipment 26,000 Lease Liability 26,000 (To the payment of lease has been made ) Lease asset is an asset for the company and it increases the asset account. Hence, lease account will be debited. Lease agreement increases the lease liability of the company. Hence, lease liability account will be credited. Conclusion: Hence, Lease asset-equipment account is debited and lease liability account is credited.

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