Chapter 21, Problem 3CA

To determine

Lease: A contractual arrangement between the owner of the asset and the user of the asset for a fixed amount of money is termed lease. In this contract the owner of the asset permits the user to use the property for a fixed sum of money received at the time of handing over the asset. At the end of the contract tenure the user of the asset need to return the asset to the owner. The parties involved in the contract are termed the lessor the owner of the asset and the lessee the user of the asset.

Capital lease method: A process of using the asset for a rental payable in installments along with interest and gets the ownership of the title at the end of the lease contract is termed capital lease. In this, the owner of the asset or the lessor need not bear expenses like depreciation, insurance, maintenance and repair. All these expenses need to be paid by the lessee. In a nutshell, capital lease is like an installment sale.

Operational lease method: A process of using the asset for a rental payable in installments or in bulk without transfer of ownership of the asset is termed operation lease. The lessee has to return back the asset once the tenure of lease is over. The expenses like insurance, maintenance and repair expenses are borne by the lessor.

(a)

To determine the type of lease.

To determine

(b)

To determine the amount of lease inception for each type of lease.

To determine

(c)

To determine changes in the minimum lease payment if the lease payment are computed based on the straight line method.