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
EBK INTERMEDIATE ACCOUNTING: REPORTING
- Which of the following should be included by the lessee in determining the amount of the right-to-use asset and lease liability:arrow_forwardOutline the accounting processes that must be followed by a lessee when using the operational lease method.arrow_forwardOutline the accounting processes necessary for a lessee to use the operating lease technique.arrow_forward
- Outline the accounting procedures involved in applying the operating lease method by a lessee.arrow_forwardBriefly discuss the conceptual foundation for asset and liability recognition in a lease transaction using the lessee's right-of-use methodology.arrow_forwardA lessee should classify a lease transaction as a capital lease if it is noncancelable and one or more of four classification criteria are met. Otherwise, it is an operating lease. What are these criteria?arrow_forward
- Describe the accounting processes that a lessee must follow while using the operational lease method.arrow_forwarddistinguish between a fi nance lease and an operating lease from the perspectives of the lessorand the lessee;arrow_forwardDistinguish between a financing lease and an operational lease from the lessee's standpoint.arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning