Leases And The Lease Of Lease

1650 Words Oct 3rd, 2014 7 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 under GAAP.

There are different types of leases depending on which side you are looking at. If you are looking at the lessee side there are the operating leases and the capital leases. If you are looking at the lessor side there are the operating lease, direct financing lease, leverage lease and the sales-type lease. Listed below are the classifications/standards of leases under GAAP.

Classifications/standards for lessor and lessee are:
1. Ownership: “The agreement specifies that ownership of the asset transfers to the lessee.” (Spiceland, Sepe, Nelson, 2005, Ch 15 pg.. 715) (FASB ASC par. 840-10-25-1)
• The objective is to figure out when the risks and rewards of ownership have been transferred to the lessee. If legal title passes to…

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