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CHAPTER 22 Accouting for lease

CHAPTER 22 Accouting for lease - Chapter 22 Accounting for...

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Chapter 22 Accounting for Leases LECTURE OUTLINE The material in this chapter can be covered in four class periods. Students generally are unfamiliar with lease terminology; therefore, it might be beneficial to discuss concepts and terminology before demonstrating the technical aspects of recording leases. Illustrations 22-3, 22-5, 22-7, 22-8, demonstrate the lease accounting entries made by both the lessee and lessor and they are all based on the same example data. A. Leases. 1. Definition: Contractual agreement between a lessor and a lessee that conveys to the lessee the right to use specific property owned by the lessor for a specified period of time. 2. Advantages of leasing: Conservation of cash, flexibility, tax advantages, protection against obsolescence, less costly financing, and off-balance-sheet financing. 3. Provisions of leases: For example, duration, rental payments, executory costs, cancelability, restrictions, and alternatives of the lessee at termination. 4. Basic premise of lease accounting: Substance over form. Leases that transfer substantially all the benefits and risks of property ownership should be capitalized because it is similar to an installment purchase. B. Lessees. 1. Operating versus Capital Leases. Discuss capitalization criteria. Teaching Tip Illustration 22-1 lists the lessee’s capitalization criteria. Illustration 22-2 provides a flowchart that summarizes the accounting for leases by the lessee. 2. Operating Method: Rent expense recognized as property is used; note disclosure requirements.
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3. Capital Lease Method: Asset and liability recorded at lower of (1) PV of the minimum lease payments or (2) FMV of the leased asset. Teaching Tip Illustration 22-3 provides a numerical example of the entries made by a lessee for a capital lease . Entries made by the lessor are also provided for comparative purposes.
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