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Concept explainers
Does the lessee become the owner of the equipment when entering into an agreement to lease a piece of equipment? Explain.
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Answer to Problem 18.1Q
The lease only implies the transfer in disposal of asset and not a shift in ownership.
Explanation of Solution
Lease:
A lease or a lease agreement is a binding contract between two parties that states renting of asset for use under specific conditions, terms and clauses, usually for a period of 12 months or more. The lease takes into consideration the profiles of both parties and mentions any tools or terms for protection of the parties. The entity that gives out the asset on rent is the lessor and the entity that borrows the asset in exchange for payment of money is the lessee.
When a lease is drawn out, the agreement states the lessee obtains the right to use an asset; this right is given the lessee by the lessor in exchange for rental payments. Thus, the lessor is obligated to transfer productivity of assets as mentioned in the agreement but still remains the owner of the asset while the lessee has the right to acquire the asset they have paid the rent for.
Thus, the ownership of equipment does not transfer to the lessee from the lessor.
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Chapter 18 Solutions
Intermediate Accounting
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