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

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Answer 1

Question

Chapter 20, Problem 1GI

To determine

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

Expert Solution & Answer

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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Belle Garments manufactures customized T-shirts for football teams. The business uses a perpetual inventory system and has a highly labour-intensive production process, so it assigns manufacturing overhead based on direct labour cost. The business operates at a profit margin of 33% on sales. Belle Garments expects to incur $2,205,000 of manufacturing overhead costs and estimated direct labour costs of $3,150,000 during 2025. At the end of December 2024, Belle Line Garments reported work in process inventory of $93,980 - Job FBT 101 - $51,000 & Job FBT 102 - $42,980 The following events occurred during January 2025. i) Purchased materials on account, $388,000. The purchase attracted freight charges of $4,000 ii) Incurred manufacturing wages of $400,000 iii) Requisitioned direct materials and used direct labour in manufacturing. Job # FBT 101 FBT 102 FBT 103 FBT 104 Direct Materials $70,220 97,500 105,300 117,000 iv) Issued indirect materials to production, $30,000. Direct Labour $61,200…

Answer 2

Question

Chapter 20, Problem 1GI

To determine

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

Expert Solution & Answer

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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Answer 3

Question

Chapter 20, Problem 1GI

To determine

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

Expert Solution & Answer

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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Answer 4

Question

Chapter 20, Problem 1GI

To determine

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

Expert Solution & Answer

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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Answer 5

Chapter 20, Problem 1GI

To determine

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

Expert Solution & Answer

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.

Answer 6

Chapter 20, Problem 1GI

To determine

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

Expert Solution & Answer

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.

Answer 7

Chapter 20, Problem 1GI

To determine

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

Answer 8

Expert Solution & Answer

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.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Ch. 20 - Prob. 1GI Ch. 20 - What is the difference between the lessee and...Ch. 20 - Prob. 3GI Ch. 20 - Prob. 4GI Ch. 20 - Prob. 5GI Ch. 20 - Prob. 6GI Ch. 20 - What are the two types of lease classifications...Ch. 20 - Prob. 8GI Ch. 20 - Prob. 9GI Ch. 20 - Prob. 10GI

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

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

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