CH21_Lease_Part_1_Lessee_

CH21_Lease_Part_1_Lessee_ - Chapter 21: Accounting for...

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Chapter 21: Accounting for Leases Learning Objectives: 1. Explain the nature, economic substance, and advantages of lease transactions. 2. Describe the accounting criteria and procedures for capitalizing leases by the lessee. 3. Contrast the operating and capitalization methods of recording leases. 4. Identify the classifications of leases for the lessor. 5. Describe the lessor’s accounting for direct- financing leases. 11
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Leasing Environment Who are players? Advantages of leasing Conceptual nature of a lease Accounting by Lessee Accounting by Lessor Special Accounting Problems Capitalization criteria Accounting differences Capital lease method Operating method Comparison Residual values Sales-type leases Bargain- purchase option Initial direct costs Current versus noncurrent Disclosure Unresolved problems Economics of leasing Classification Direct-financing method Operating method Accounting for Leases
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Largest group of leased equipment involves: Information technology Transportation (trucks, aircraft, rail) Construction Agriculture A lease is a contractual agreement between a lessor and a lessee, that gives the lessee the right to use specific property, owned by the lessor , for a specified period of time. The Leasing Environment
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Banks: The largest lessors in the leasing industry. They provide general finance for companies. Captive leasing companies : subsidiaries whose primary business is to perform leasing operations for the parent company (i.e., structure lease contracts for the parent companies and their customers). Examples: Chrysler Financial (for Daimler-Chrysler), IBM Global Financing (for IBM), Boeing Capital. Independents. Independents: leasing companies whose primary business is to perform general finance for other companies. Their market share of leasing business has declined as the other two types of lessor’s market share has increased. Who Are the Players? The Leasing Environment
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1. 100% Financing at Fixed Rates. 2. Protection Against Obsolescence. 3. Flexibility. 4. Less Costly Financing. 5. Tax Advantages. 6. Off-Balance-Sheet Financing. Advantages of Leasing The Leasing Environment
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The Leasing Environment The issue of how to report leases is the case of substance versus form. Although technically legal title may not pass, the benefits from the use of the property do. Operating Lease Journal Entry: Rent expense xxx Cash xxx Operating Leases : Leases that do not transfer substantially all the benefits and risks of ownership
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Journal Entry: Leased equipment xxx Lease liability xxx Capital Lease : A lease that transfers substantially all of the benefits and risks of property ownership should be capitalized. Note: only noncancellable leases may be capitalized
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This note was uploaded on 09/29/2011 for the course ACCT 302 taught by Professor Staff during the Spring '11 term at S.F. State.

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CH21_Lease_Part_1_Lessee_ - Chapter 21: Accounting for...

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