Discussion Topic: CA21-4 Capital leases and operating leases are the two classif
ID: 2455550 • Letter: D
Question
Discussion Topic: CA21-4
Capital leases and operating leases are the two classifications of leases described in FASB pronouncements from the standpoint of the lessee.
Do not discuss the criteria for distinguishing between capital leases and operating leases.
Answer the following questions in the Discussion Board:
Describe how a capital lease would be accounted for by the lessee both at the inception of the lease and during the first year of the lease, assuming the lease transfers ownership of the property to the lessee by the end of the lease.
Describe how an operating lease would be accounted for by the lessee both at the inception of the lease and during the first year of the lease, assuming equal monthly payments are made by the lessee at the beginning of each month of the lease. Describe the change in accounting, if any, when rental payments are not made on a straight-line basis.
Compare and contrast a sales-type lease with a direct-financing lease as follows.
Lease receivable.
Recognition of interest revenue.
Manufacturer’s or dealer’s profit.
Explanation / Answer
Describe how a capital lease would be accounted for by the lessee both at the inception of the lease and during the first year of the lease, assuming the lease transfers ownership of the property to the lessee by the end of the lease.
A lessee would account for a capital lease as an asset and an obligation at the inception of the lease. Rental payments during the year would be allocated between a reduction in the liability and interest expense. The asset would be amortized in a manner consistent with the lessee’s normal depreciation policy for owned assets, except that in some circumstances, the period of amortization would be the lease term.
Describe how an operating lease would be accounted for by the lessee both at the inception of the lease and during the first year of the lease, assuming equal monthly payments are made by the lessee at the beginning of each month of the lease. Describe the change in accounting, if any, when rental payments are not made on a straight-line basis.
No asset or liability would be recorded at the inception of the lease. Normally, rental on an operating lease would be charged to expense over the lease term as it becomes payable. If rental payments are not made on a straight-line basis, rental expense nevertheless would be recognized on a straight-line basis unless another systematic or rational basis is more representative of the time pattern in which use benefit is derived from the leased property, in which case that basis would be used.
Compare and contrast a sales-type lease with a direct-financing lease as follows.
Lease receivable
(a) The lease receivable in the lease is the same for both a sales-type and a direct-financing lease. The lease receivable is the present value of the minimum lease payments (net of amounts, if any, included therein for executory costs such as maintenance, taxes, and insurance to be paid by the lessor, together with any profit thereon) plus the present value of the unguaranteed residual value accruing to the benefit of the lessor.
Recognition of interest revenue.
(b) For both a sales-type lease and a direct-financing lease, the interest revenue is recognized over the lease term by use of the interest method to produce a constant periodic rate of return on the lease receivable. However, other methods of income recognition may be used if the results obtained are not materially different from the interest method.
Manufacturer’s or dealer’s profit.
(c) In a sales-type lease, the excess of the sales price over the carrying amount of the leased equipment is considered manufacturer’s or dealer’s profit and would be included in income in the period when the lease transaction is recorded.
In a direct-financing lease, there is no manufacturer’s or dealer’s profit. The income on the lease transaction is composed solely of interest
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.