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Chapter 15 NEW - Leases Chapter 15 Prepared by Prof...

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Accounting 124 / Leases 1 Leases Chapter 15 Prepared by: Prof. Elizabeth K. Venuti
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Accounting 124 / Leases 2 Overview of Leasing Lease Contractual agreement between a lessor (e.g., landlord) and a lessee (e.g., tenant). Gives lessee right to use specific property. Contains provisions including (but not limited to): Duration of lease. Periodic rental payments. Party responsible for taxes, insurance and maintenance (‘executory costs’). Cancellation terms. Purchase options.
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Accounting 124 / Leases 3 Conceptual Problems with Lease Transactions Substance over form. Accounting dilemma: Capitalize all leases? Capitalize no leases? Capitalize some leases? Which leases should be capitalized?
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Accounting 124 / Leases 4 FASB Position on  Lease Capitalization Capitalize some leases. A lease transferring substantially all of the benefits and risks of ownership should be capitalized. Very rigid rules are in place for determining which leases should be capitalized (FAS 13).
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Accounting 124 / Leases 5 Lessee Accounting If lease passes at least one of the following four tests, lease should be capitalized: Transfer of Ownership Test Lease transfers ownership of property to lessee at end of lease term. Bargain Purchase Option Test Lease contains a bargain purchase option. Economic Life Test Lease term > 75% of economic life of leased property.
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