Chapter_21_(continued)_and_23

Chapter_21_(continued)_and_23 - Chapter 21 (continued)...

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Chapter 21 (continued) Leases
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Comparison of Capital with Operating Lease While the total charges to operations are the same over the lease term whether the lease is accounted for as a capital lease or as an operating lease, under the capital lease treatment the charges are higher in the earlier years and lower in the later years. If an accelerated method of depreciation is used, the differences between the amounts charged to operations under the two methods would be even larger in the earlier and later years. The following differences occur if a capital lease instead of an operating lease is employed: a. an increase in the amount of reported debt (both short-term and long-term), b. an increase in the amount of total assets (specifically long-lived assets), and c. a lower income early in the life of the lease and, therefore, lower retained earnings.
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Lease Accounting for the Lessor For lessor accounting purposes, all leases may be classified as: (a) operating leases, (b) direct financing leases, or (c) sales-type leases. The lessor should classify and account for an arrangement as a direct financing lease or a sales-type lease if at the date of the lease agreement one or more of the following Group I criteria are met and both of the following Group II criteria are met. Group I a. The lease transfers ownership of the property to the lessee. b. The lease contains a bargain purchase option. c. The lease term is equal to 75% or more of the estimated economic life of the leased property. d. The present value of the minimum lease payments (excluding executory costs) equals or exceeds 90% of the fair value of the leased property. Group II a. Collectibility of the payments required from the lessee is reasonably predictable. b. No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease.
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Sales Type Vs. Direct Financing The distinction between a direct financing lease and a sales-type lease is that a sales-type lease involves manufacturer’s or dealer’s profit (or loss) and a direct financing lease does not. The primary difference between applying the financing method to a direct financing lease and applying it to a sales-type lease is the recognition of the manufacturer’s or dealer’s profit at the inception of the lease. The profit or loss to the lessor is evidenced by the difference
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Chapter_21_(continued)_and_23 - Chapter 21 (continued)...

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