Intermediate accounting

Intermediate accounting

Capital leases are agreements that are formulated outwardly as leases, but that are in reality installment purchases. Professional judgment is needed to differentiate between leases that represent “rental agreements” and those that in reality re “installment purchases/sales. ” The FAST provides guidance for distinguishing between the two fundamental types of leases. Question 15-2 periodic interest expense is calculated by the lessee as the effective interest rate times the amount of the outstanding lease liability during the period.

This same principle applies to the flip side of the transaction, that is, the lessee’s lease receivable (net investment). The approach is the same regardless of the specific form of the debt, that is, whether in the form of notes, bonds, leases, pensions, or other debt instruments. Question 15-3 Leases and installment notes are very similar. The fundamental nature of the transaction remains the same regardless of whether it is negotiated as an installment purchase or as a lease.

In return for providing financing, the borrower (lessee) pays interest over the maturity (lease term). Conceptually, leases and installment notes are accounted for in precisely the same way. Question 15-4 Current GAP does allow airlines’ balance sheets to appear as if the companies don’t have airplanes. Theses because most airlines extensively use operating leases to “acquire” airplanes. Ender current rules, under operating leases, unlike capital leases, neither the leased asset nor the lease liability is reported in the balance sheet. Question 15-5 The criteria are: (1) the agreement specifies that ownership of the asset transfers to the lessee, (2) the agreement contains a bargain purchase option, (3) the lease term is equal to 75% or more of the expected economic life of the asset, or (4) the present value of the minimum lease payments is equal to or greater than 90% of the fair value of the leased asset.

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