Lease Treatment

In: Business and Management

Submitted By oldenburg
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Pages 2
Lease Treatment week 3 group:

Here is each type of lease, the lease classification for the new truck and how each lease is accounted for: | Capital Lease | Operating Lease | Lease criteria - Ownership | Ownership of the asset might be transferred to the lessee at the end of the lease term. | Ownership is retained by the lessor during and after the lease term. | Lease criteria - Bargain Purchase Option | The lease contains a bargain purchase option to buy the equipment at less than fair market value. | The lease cannot contain a bargain purchase option. | Lease criteria - Term | The lease term equals or exceeds 75% of the asset's estimated useful life | The lease term is less than 75 percent of the estimated economic life of the equipment | Lease criteria - Present Value | The present value of the lease payments equals or exceeds 90% of the total original cost of the equipment. | The present value of lease payments is less than 90 percent of the equipment's fair market value | Risks and Benefits | Transferred to lessee. Lessee pays maintenance, insurance and taxes | Right to use only. Risk and benefits remain with lessor. Lessee pays maintenance costs | Accounting | Lease is considered as asset (leased asset) and liability (lease payments). Payments are shown in Balance sheet | No risk of ownership. Payments are considered as operating expenses and shown in Profit and Loss statement | Tax | Lessee is considered to be the owner of the equipment and therefore claims depreciation expense and interest expense | Lessee is considered to be renting the equipment and therefore the lease payment is considered to be a rental expense |

I believe the new truck should be classified under operating lease accounting.
An operating lease is treated like renting -- payments are considered operational expenses and the asset being leased stays off the balance…...

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