Leases And The Lease Of Lease

1650 Words7 Pages
Leases are an arranged contract in which the lessor (the owner) provides the lessee (the user) the right to use an asset (car, apartment, equipment, etc.) for a specified time period. To be able to do this, the lessee must agree to make arranged periodic payments during the term of the lease. An example of this would be like an apartment lease it’s a typical rental agreement in which the basic rights and responsibilities of ownership are retained by the lessor; the lessee merely uses the asset (apartment, car, etc.) for a certain period of time. (Spiceland, Sepe, Nelson, 2005, Ch 15 pg. 712) In this memo, I will explain the basic lease classifications, the standards for leases and the effects they have on the balance and income statements…show more content…
(Spiceland, Sepe, Nelson, 2005, Ch 15 pg. 715) (FASB ASC par. 840-10-25-1)
2. Bargain Price Option: “The agreement contains a bargain purchase option.” (Spiceland, Sepe, Nelson, 2005, Ch 15 pg. 715) (FASB ASC par. 840-10-25-1)
• A bargain purchase option (BPO) is a provision in the lease contract that gives the lessee the option of purchasing the leased asset at a bargain price. It is defined as a price much lower than the expected fair value of the asset. Only when it becomes exercisable, than the option appears reasonably assured at the beginning of the lease. This is hard to practice because it is necessary to make a judgment now about whether future option price will be a bargain. (Spiceland, Sepe, Nelson, 2005, Ch 15 pg.. 715) (FASB ASC par. 840-10-25-1)
3. Estimated Economic Life: “The non-cancelable lease term is equal to 75% or more of the expected economic life of the asset.” (Spiceland, Sepe, Nelson, 2005, Ch 15 pg. 715) (FASB ASC par. 840-10-25-1)
• When an asset is leased for most of its useful life, then most of the benefits and responsibilities of ownership are transferred to the lessee. It is assumed that 75% or more of the expected economic life of the asset is an appropriate threshold point for this purpose. This could be a problematic because the lease term is not really certain, it may be renewable beyond what was initially stated or it may be cancelable after a specific
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