Lease Lease is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’. As per the notes issued by Financial Accounting Standard Board (FASB), the following are four criteria to determine a lease is a capital lease or an operating lease: 1. Transfer of title: The asset is transferred to lessee at the end of the lease period concerned. 2. Purchase option: The purchase option is exercisable when the purchase price is sufficiently lower than expected fair value. 3. Economic life: The economic life of the lease period is 75% or more than the useful life of the asset. 4. Value recovery: Present value of lease payments is greater or equal to 90% of the fair value. If a particular lease fulfils any one of the above four criteria, then it is considered as Capital lease . If a lease does not fulfil any of the above four criteria, it would be considered as operating lease . To determine: the type of lease.

Question

Want to see the full answer?

Answer 1

Question

Chapter 15, Problem 1CPA

To determine

Lease

Lease is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.

As per the notes issued by Financial Accounting Standard Board (FASB), the following are four criteria to determine a lease is a capital lease or an operating lease:

1. Transfer of title: The asset is transferred to lessee at the end of the lease period concerned.

2. Purchase option: The purchase option is exercisable when the purchase price is sufficiently lower than expected fair value.

3. Economic life: The economic life of the lease period is 75% or more than the useful life of the asset.

4. Value recovery: Present value of lease payments is greater or equal to 90% of the fair value.

If a particular lease fulfils any one of the above four criteria, then it is considered as Capital lease.

If a lease does not fulfil any of the above four criteria, it would be considered as operating lease.

To determine: the type of lease.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

Please explain this financial accounting problem with accurate financial standards.

Hindenburger, Inc., began operations on January 1. It made 5,000 burgers and sold 4,000 of them. Hindenburger incurred the following costs: Raw materials $1,000 Wagos of production workers 7,000 Rent for corporate headquarters 5,000 Depreciation on manufacturing equipment 2,000 Commissions paid to sales people 4,000 Calculate the total product cost for the year ended December 31.

Horizon Innovations incurred $120,000 in research and development costs and $60,000 in legal fees to acquire a patent. The patent has a legal life of 20 years and a useful life of 8 years. What amount should Horizon record as Patent Amortization Expense in the first year? a. $7,500 b. $15.000 c. $22,500 d. $0