Chapter 17 - Solution Manual

Similarly the lease obligates the entity to make

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Similarly, the lease obligates the entity to make future cash payments and meets the definition of a liability. Liabilities are defined by SFAC No. 6 as probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. They embody a present duty or responsibility to one or more other entities (in this case to the lessor) that entails settlement by probable future transfer or use of assets at a specified determinable date. The lease payments are set and will entail the payment of assets (cash) to the lessor at specified amounts and dates according to the lease contract. Finally, the transaction or event (the initiation of the lease contract) obligating the entity to make the lease payments has already happened. Since the lease meets the definitions of assets and liabilities, it should be reported as a capital lease. If not, the financial statements will not be reliable. They will not report what they purport to represent. That is they will not be representationally faithful, nor will they be neutral. They will omit information which is have predictive value and is relevant to user decision-making. Finally, it is not reasonable to assume that no one owns the asset. If it is a sale to the lessor, the lessor does not report the asset. If the asset does not belong to the lessor, then it must be the lessee’s asset. Unknown Deleted: Unknown Deleted: Unknown Deleted: Unknown Deleted: Unknown Deleted: Unknown Deleted: Unknown Deleted: Unknown Deleted:
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381 Team 2 Argue for treating the lease as an operating lease If the lessee does not guarantee the salvage value then the lessee is not acting as an owner. The lessee is only using the asset temporarily. Rather, the payments to the lessor only represent rent. When the lessee calculates the present value of the minimum lease payments, the third party guarantees of salvage are not included, and the present value thus calculated is not virtually all of the value of the asset. The lessee then treats the lease as an operating lease. The lessee will be following generally accepted accounting principles. The lease criteria found in SFAS No. 13 are intended to be used to determine whether a lease should be capitalized or not. If they do not meet at least one of the four lease criteria, the transaction does not indicate that a purchase of an asset has occurred or that a liability has been incurred. Instead the lease payments are considered a period expense. If none of the lease criteria are met, then the leased asset will revert to the lessor at the end of the lease term. Title to the asset will never have belonged to the lessee. Hence, the lessee has only temporary use, or control of the asset and does not meet the definition of an asset. Moreover, the lessee will not have acquired substantially all of the economic benefits to be derived from the leased asset
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