Concept explainers
Lease
Lease is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.
To explain: influence of concept of “Substance over form”.
Explanation of Solution
When accounting for leases, the legal form of agreement is irrelevant. A finance lease is not same as purchasing an asset outright. The rights which an lessee receives from a lease agreement is different from rights transferred in purchase of an asset.
Depending on the substance of leasing agreement, lease is accounted as either Rental agreement or purchase/sale along with debt financing. Professional judgement is needed to identify the type of lease which is “Installment purchase/sales” and those are “Rental agreements”. The Financial Accounting Standards Board (FASB) provides guidelines for differentiating between the two basic types of leases.
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Chapter 15 Solutions
LooseLeaf Intermediate Accounting w/ Annual Report; Connect Access Card
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- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning