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ACC 400 Accounting for Decision Making week 5 Case 13-4 and Case 13-5 Lease Classifications Answer

Case 13-4 Application of SFAC Number 13

A -The Theoretical Basis for the Accounting Standard that requires certain long-term leases to be capitalized by the lessee. Certain condition for specific long-term leases that is the theoretical basis for accounting standards. The condition that must be met for capital leases are as follows.

 

  1. The contract for the lease has to be put in possession of the lessee at the end of the lease time frame if not before.
  2. The lease contract includes an option to buy the assets at a lower price.
  3. The time frame of the lease contract has to be at least 75% if not more of the predicted period of the asset.
  4. When the lease contract begins, the current amount of installments should be around 90% of the fair amount of the asset being leased.

B –How should Lani account for this lease at its inception and a determination made of the amount recorded?

Lanie should be able to see the documented fair or current value of the upcoming installments as debit to fixed assets and also the capital lease as credit to obligation.

C – Expenses related to this lease Lani incurs during the first year of the lease, and how will they be determined?

The expenditure related to the lease Lani will incur should be in the form of a prepared amortization table with the principal amounts and interest clearly separated for each of the installments. The interest should be documented as an expense just as depreciation will be documented as an expense on the assets leased.

D – How should Lani report the lease transaction on its December 31, 2006, balance sheet?

The leased item on the December 31, 2006 balance sheet would be documented as fixed assets as follows.

 |Fixed Assets           |Long-Term Liability                      |Current Liability                     |

|                                     |                                     |The current part of the               |

|                                     |Responsibilities or accountability   |responsibilities or accountability is |

|Lease Assets Depreciated at Cost Less|are answerable to capital lease,     |answerable to finance lease, which     |

|                                     |meaning the installments have to be   |mean the installments have to be paid |

|                                     |paid after the first year             |in the year following the first year. |

Case 13-5

Lease Classifications

 

A – What criteria must be met by the lease in order that Doherty Company classify it as a capital lease?

The Doherty company has to meet certain criteria in the lease for the lease to be classified as a capital lease. The first criteria is that the leased asset has to be able to be transferred to the lessee by the end of the leasing period stated in the lease. A buy out alternative has to be included in the lease with a substantially discounted cost as opposed to the market value to the lessee on the date asset can be purchased. The lease time frame has to be a minimum of 75% of the leased assets business related life. The current value of the payments leased have to be the same or more than 90% of the fair amount and the rate of interest to decrease the payments of the lease is less than the lessee’s accumulative borrowing rate.

B – What criteria must be met by the lease meet in order that Lambert Company classify it as a sales-type or direct financing lease?

The criteria that has to be met for the Lambert company to categorize the lease as sales-type lease would be for Lambert to be an equipment dealer. The lease would be a direct financing lease if Lambert was not an equipment dealer.

C – Contrast a sales-type lease with a direct financing lease

A capital lease would apply when the person leasing would be a dealer or a company that sells leased equipment. “A capital lease is an example of accrual accounting’s inclusion of economic events” (Investopedia, pg. 1, 2010). If the dealer or owner of the company do not lease the assets, the lease would be referred to as a direct financing lease. With a sale type lease, the complete rate of interest would be the current amount of the least payments is sellers rate of the asset leased. From the time the lease began, the lessor realizes a gross profit that would be the same as the current amount of the least of the leased payments minus the cost associated with the asset leased. The interest income would be the same as compared to the complete interest rate multiplied by the net lease retrieved at the beginning of the time frame in the lease. A capital lease would apply when the leaser doe not deal in the assets being leased, in which the lease would be considered a direct financing lease. A gross income would

not be realized when the lease starts, so all the profit incoming would interest. The total rate would be the current value of the least amount of leased payments would be the same as the leased assets expenditures. The income from the interest would also be the same as the complete interest rate multiplied by the net lease coming in at the start of the lease time frame.

References

 

Investopedia, 2010, Capital Lease, Retrieved June 20, 2010, http://www.investopedia.com/terms/c/capitallease.asp

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