Chapter 13 - Solution Manual

If the leased asset does not belong to the lessee

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If the leased asset does not belong to the lessee then payments for its use are merely periodic rent and as such should be treated as rent expense. As such they do not represent payments on a liability. Thus, it would be inappropriate to record a liability for a lease that is not in essence a purchase of an asset. Debate 13-2 Lease Accounting Symmetry Team 1 Accounting transparency and the Conceptual Framework requires that a company’s financial statements reflect its assets, liabilities, and owners’ equity as of the balance sheet date as well as its revenues, expenses, gains and losses that occurred over the accounting period. The lessee should classify a lease as an operating lease when it does not meet any of the four capital lease criteria, regardless of the accounting approach taken by the lessor. In other words, the accounting treatment of one company should not dictate the accounting treatment of another, even when accounting for the same transaction. Just because the lessor accounts for a lease as a sales-type lease does not imply that the lessee must report the lease as a capital lease. SFAS No. 13 does not require that both parties to the lease account for it in the same manner. Both parties may not measure items used to determine whether the lease meets any of the four lease criteria in the same way. For example the number of years to useful life from one company’s perspective may differ from that of the other. Just because the lease meets the useful life criterion for the lessor does not imply that it also must be met by the lessee. If not, then the lessee would not have leased the asset for substantially all of its useful life and thus from the lessee’s perspective the lease does not have the Unknown Deleted:
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290 characteristics of asset ownership. Similarly, the estimate of the asset’s fair value is not required to be the same for both parties to the lease. Hence, the lessor may believe that the 90% test is met while the lessee may not. Team 2 Accountants should report the economic substance of economic events and transactions. The transaction or event, in this case, is the occurrence of a lease, should dictate its accounting treatment. It is logical that if one company sells an asset to another, the second party must have bought it. The asset in question must be owned by someone – if not the lessor, then it is owned by the lessee. If the lessor determines that the lease is a sales-type lease, then the lease must have met the four capital lease criteria. Those four criteria are intended to determine whether an assets a lease that transfers substantially all of the benefits and risks incident to the ownership of property from the lesssor to the lessee. If so, it should be accounted for as the acquisition of an asset and the incurrence of an obligation by the lessee and as a sale or financing by the lessor. All other leases should be accounted for as operating leases. In a lease that transfers substantially all of the benefits and risks of ownership, the economic effect on the parties is similar, in many respects, to that of an installment purchase.
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