M351 Notes-Day 7 - M351 Notes Class 7 Leases pages 1014-1135 A What has to be true for point#2 on page 1118 to produce an advantage for the lessee

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M351 Notes, Class 7: Leases, pages 1014-1135 A. What has to be true for point #2 on page 1118 to produce an advantage for the lessee? B. There are two kinds of leases: capital and operating C. Lease capitalization criteria (meet any one and a non-cancelable lease must be accounted for as a capital lease for the lessee): 1. Lease transfers ownership of the property to the lessee 2. Lease contains a bargain purchase option 3. Lease term is greater than or equal to 75% of the economic life of the leased property (An original lease term plus a bargain renewal option can create a lease term that exceeds the 75% of economic life) 4. The present value of the minimum lease payments is greater than or equal to 90% of the fair value of the leased property (lease executory costs paid by the lessee are excluded from the minimum lease payments for the 90% fair value test). D. The discount rate a lessee uses when computing the present value of the lease payments is its incremental borrowing rate , or, if smaller, the lessor’s implicit rate . E. When a lessee uses an Operating Lease, no asset is recorded and the rental payments are considered rent expense. When a lessee uses a Capital Lease , an asset and a liability are recorded and the lease payments contain both interest and principal reduction ; additionally, the lessee records depreciation expense on the leased asset. F.
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This note was uploaded on 02/06/2011 for the course MGMT 351 taught by Professor Staff during the Spring '08 term at Purdue University-West Lafayette.

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M351 Notes-Day 7 - M351 Notes Class 7 Leases pages 1014-1135 A What has to be true for point#2 on page 1118 to produce an advantage for the lessee

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