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ch 21 - 21 ACCOUNTING FOR LEASES CHAPTER OBJECTIVES After...

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21 ACCOUNTING FOR LEASES CHAPTER OBJECTIVES After careful study of this chapter, students will be able to:  1. Explain the advantages of leasing.  2. Understand key terms related to leasing.  3. Explain how to classify leases of personal property.  4. Account for a lessee's operating and capital leases.  5. Understand disclosures by the lessee.  6. Account for a lessor's operating, direct financing, and sales-type leases.  7. Understand disclosures by the lessor.  8. Explain the conceptual issues regarding leases.  9. Understand lease issues related to real estate, sale-leaseback issues, leveraged leases, and  changes in lease provisions (Appendix). 21-1
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SYNOPSIS Advantages of Leasing  1. In FASB Statement No. 13 as Amended , a lease  is defined "as an agreement conveying the right to  use property, plant, or equipment (land or depreciable assets or both) usually for a stated period of  time."  A lessee  acquires the right to use the property, plant, or equipment.  A lessor  gives up that  right.  Other key terms from the Statement  are listed in Exhibit 21-1 in the text.  2. Although leases are generally more expensive in the long run than purchases, the advantages of  leases from the lessee's point of view include:  (1) Financing benefits :  An asset may be acquired  with 100% financing, conserving cash for the lessee.  A lease contract may be more flexible than  other debt arrangements, and a lease creates a claim only against the leased equipment, rather  than against all assets.  (2) Risk benefit :  The risks of obsolescence, so that the risk is borne by the  lessor.  (3) Tax benefit :  Tax deductions, taken over the life of the lease, may be accelerated, and  the full cost of the asset, including land, may be written off.  (4) Financial reporting benefit :  Some  key financial ratios are improved when a leased asset is not recorded as an asset and a liability by  the lessee.  (5) Billing benefit :  The interest element in lease payments may be charged to  customers under some contracts, while debt interest may not.  3. The main advantages of leases from the lessor's point of view are that leasing provides (a) a way  of indirectly making a sale; and (b) another means of obtaining a profit opportunity through the  transfer of an asset by the lessor under the lease agreement. Classification of Personal Property Leases   4. FASB Statement No. 13 as Amended , based on the concept of economic substance  over legal  form, concluded that a lease which transfers substantially all the risks and benefits  of ownership  represents in substance a purchase by the lessee and a sale by the lessor of an asset.  The 
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