Leases - Leases A lease is a contractual arrangement by...

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Leases A lease is a contractual arrangement by which a lessor/owner provides a lessee/user the right to use an asset for a specified period of time. In return, the lessee agrees to make periodic cash payments during the term of the lease. An apartment lease is a typical rental agreement referred to as an operating lease in which the fundamental rights and responsibilities of ownership are retained by the lessor. Capital leases (Direct financing or sales-type leases to the lessor) are contracts that are formulated outwardly as leases, but in reality are installment purchases/sales. Typically, Lessee : 1.Operating Lease 2.Capital Lessor : 1.Operating Lease 2.Direct Financing Lease or Sales-type lease Leasing sometimes is used as a means of off- balance-sheet financing. Operational, tax, and financial market incentives often make leasing an attractive alternative to purchasing. Lease Classification Capital Leases : A lessee should classify a lease transaction as a capital lease if it includes a noncancelable lease term and one or more of the four criteria listed are met. Otherwise, it is an operating lease. 1. The agreement specifies that ownership of the asset transfers to the lessee. 2. The agreement contains a bargain purchase option. 3. The noncancelable lease term is equal to 75% or more of the expected economic life of the asset. 4.
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