ch 15 LN leases final version

ch 15 LN leases final version - 15-1Ch 15 LeasesLearning...

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Unformatted text preview: 15-1Ch 15 LeasesLearning Objectives1.Describe the circumstances in which leasing makes more business sense than does an outright sale and purchase.2.Understand the accounting issues faced by the asset owner (lessor) and the asset user (lessee) in recording a lease transaction.3.Outline the types of contractual provisions typically included in lease agreements.4.Apply the lease classification criteria in order to distinguish between capital and operating leases.5.Properly account for both capital and operating leases from the standpoint of the lessee (asset user).6.Properly account for both capital and operating leases from the standpoint of the lessor (asset owner).7.Prepare and interpret the lease disclosures required of both lessors and lessees.15-2Describe the circumstances in which leasing makes more business sense than does an outright sale and purchase.OBJECTIVE 1Basics:The lease is a contractual agreement between the lessor and the lessee. The lease gives the lessee the right to use specific property in return for a payment or series of payments.The lease contract specifies the duration of the lease (lease term) and rental payments.15-3Economic Advantages Advantages to a lessee of leasing over purchasing:A lease often involves no down payment.Leasing avoids the risks of ownership.Leasing gives the lessee flexibility to change assets when technology or preferences change.Potentially provides financial reporting advantages (i.e., off-balance-sheet financing). Advantages to a lessor over sale:Increase sales by providing financing to customers who might not otherwise be able to buy.Establishment of an ongoing relationship with customers.Retention of the residual value of the leased asset after the lease term is over.15-4Understand the accounting issues faced by the asset owner (lessor) and the asset user (lessee) in recording a lease transaction.OBJECTIVE 2For the lessor, the key issue is whether or not a sale should be recognized on the date the lease is signed. This hinges on the following factors: Whether the lease signing transfers effective ownership of the leased asset.Whether the lessor has any significant additional responsibilities remaining after the lease is signed.Whether payment collectibility is reasonably assured.For the lessee, the key issue is whether the leased asset and the lease payment obligation should be recognized on the balance sheet:The answer hinges on whether effective ownership, as opposed to legal ownership, of the leased asset changes hands.15-5Capital vs. Operating LeaseCapital leases are accounted for as if the lease agreement...
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ch 15 LN leases final version - 15-1Ch 15 LeasesLearning...

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