
Concept explainers
State the four criteria used to identify the lease as a capital lease or operating lease by the lessee.

Explanation of Solution
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’.
Operating leases: In an operating lease lessor retains all ownership risks and responsibilities.
Capital leases: In capital lease all the ownership risks and responsibilities are transferred from the lessor to the lessee.
The criteria for defining the lease as capital lease or operating lease:
As per the notes issued by Financial Accounting Standard Board (FASB), the following are four criteria to determine is a lease is a capital lease or an operating lease:
- 1. Transfer of ownership: The asset is transferred to lessee at the end of the lease period concerned.
- 2. Purchase (bargain) 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.
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Chapter 20 Solutions
Intermediate Accounting: Reporting and Analysis
- Complete the table given below and compute the WACC from theinformation provided after the table template. capital component market value weight cost of capital weight x cost of capital debt common stock preferred shares The following balance sheet extract relates to the Spread-Out AirlinesLtd.Bonds Payable $1,000,000Preferred Stock $2,000,000Common Stock $3,000,000 Additional Information:1. The bonds are 8%, annual coupon bonds, with 9 years tomaturity and are currently selling for 90% of par.2. The company’s common shares which have a book value of $25per share are currently selling at $20 per share.3. The preferred shares are 5% preferred shares with a bookvalue of $100 per share. These shares are currentlyselling at $80 per share.4. The company has an equity beta of 1.35 and the current Treasury bill rate is 3.0%. The market risk premium is1.5%5. The company’s tax rate is 30%.arrow_forwardCalculate the net sales for this financial accounting questionarrow_forwardQuick answer of this accounting questionsarrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning
