"Capital Leases and Operating Leases" Please respond to the following (two paragraphs only): · ...

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"Capital Leases and Operating Leases" Please respond to the following (two paragraphs only): · Imagine you are the senior accountant at an organization and management is considering leasing some...

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"Capital Leases and Operating Leases" Please respond to the following (two paragraphs only):

· Imagine you are the senior accountant at an organization and management is considering leasing some equipment; however, management is unsure of the impact that a capital lease would have on the company. Briefly describe the manner in which a capital lease would be accounted for by the company both at inception of the lease and during the first year of the lease, assuming that lease transfers ownership of the property to the lessee at the end of the lease.

· From the previous bulleted discussion, assume that management now has a clear understanding of capital leases, but has been informed by colleagues that an operating lease may be more beneficial than an operating lease, since the useful life for the equipment is only eight (8) years. Compare and contrast a capital lease and an operating lease, and recommend to management what type of lease would be beneficial since the equipment will become obsolete in eight (8) years. Provide a rationale for your recommendation.

Answered Same Day Dec 25, 2021

Robert · Accepted Answer

"Capital Leases and Operating Leases" Please respond to the following (two 
paragraphs only): 
· Imagine you are the senior accountant at an organization and management is 
considering leasing some equipment; however, management is unsure of the 
impact that a capital lease would have on the company. Briefly describe the 
manner in which a capital lease would be accounted for by the company both at 
inception of the lease and during the first year of the lease, assuming that lease 
transfers ownership of the property to the lessee at the end of the lease. 
· From the previous bulleted discussion, assume that management now has a 
clear understanding of capital leases, but has been informed by colleagues that 
an operating lease may be more beneficial than an operating lease, since the 
useful life for the equipment is only eight (8) years. Compare and contrast a 
capital lease and an operating lease, and recommend to management what type 
of lease would be beneficial since the equipment will become obsolete in eight (8) 
years. Provide a rationale for your recommendation. 
Solution 
A lease is contractual arrangement under which the owner of an asset (called the 
lessor) agrees to allow the use of his asset by another party (lessee) in exchange of 
periodic payments for the specified period .The lessee pays the lease rent as a regular 
fixed payments over a period of time .There are two types of leases; Operating and 
capital leases 
The following criteria must be satisfied to be called it as a capital lease. 
1) Transfer of ownership is necessary to be called as a Capital lease. 
2) A bargain purchase is a necessary condition to be called as a Capital lease. 
3) Present value of the minimum lease payments is equal to or greater than 90% of the 
fair value of the asset. 
4) 75% of the useful life of the asset is a necessary condition to be called it as a capital 
lease. 
Therefore when lease transfers all of the risks and benefits to the lessee related to the 
ownership of property then this lease is capitalized by the lessee. The economic effect 
of such a lease on the lessee is similar to that of an installment purchase in many 
cases. 
The operating lease should include the following facts:

"Capital Leases and Operating Leases" Please respond to the following (two paragraphs only): · Imagine you are the senior accountant at an organization and management is considering leasing some...

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