Explain the concept of accounting for leases and the criteria used to determine whether a lease should be classified as an operating lease or a finance lease. Discuss the implications of lease accounting on a company's financial position and performance.

Explain the concept of accounting for leases and the criteria used to determine whether a lease should be classified as an operating lease or a finance lease. Discuss the implications of lease accounting on a company's financial position and performance.

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter20: Accounting For Leases

Section: Chapter Questions

Problem 13GI: What is the basic difference between the accounting procedures used by a lessor for a sales-type...

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Concept explainers

Leasing

Leasing is a contractual arrangement in which someone (a lessee) pays the owner (or lessor) of a building, land, vehicle, or other asset for the use of that asset. The lease is the agreement between lessee and lessor.

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What is the difference between a "capital/financing lease" and an "operating lease"? Where on the various financial statements would we expect to find each of these leases reported?
What are the criteria for classifying a lease as operating or capital? Why is there a difference between the two? What are the implications of an operating lease versus a capital lease on an entity’s financial statements?
Identify the lease classifications for lessors and the criteria that must be met for each classification. What is the relevance of revenue recognition criteria for lessor accounting for leases?
Explain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.
Which of the following is a required financial statement presentation by a lessee for both capital leases and operating lease? A. Amortization Expense and Interest Expense B. Lease Expense C. Right-of-Use Asset and Lease Liability D. The reduction of the Lease Liability as a financing activity
Which of the following statements is characteristic of leases? a.If a lease is classified as an operating lease, the lessee records an asset on its statement of financial position. b.Lease agreements are not a popular form of financing the purchase of assets because leases require a large initial outlay of cash. c.If a lessor classifies a lease as a finance lease, the lessor records a lease liability on its statement of earnings. d.Accounting recognizes two types of leases—operating and finance.
Describe the accounting processes that a lessee must follow while using the operational lease method.
Explain the impact on lease accounting of uncertainties, including uncertain lease terms, variable lease payments, residual values, purchase options, and termination penalties.
In a financing lease, “front loading” of lease expense and lease revenue occurs. What does this mean, and how is it avoided in an operating lease?
Which of the following statements is true about initial direct costs? A. Initial direct costs of a sales-type lease should be expensed at the commencement of the lease only if no selling profit or loss has been incurred. B. Initial direct costs are ownership-type costs such as insurance, maintenance, and taxes. C. Initial direct costs of an operating lease should be recorded by the lessor as a prepaid asset. D. Initial direct costs should always be debited against income by the lessor in the period of the inception of the lease.
In accounting for an operating lease, how are the lessee’s and lessor’s income statements affected?
Discuss how the lease liability would be measured at lease inception.