Types of Leases
On January 1, Hazard Company, a lessee, entered into three noncancelable leases for brand new general equipment: Lease J, Lease K, and Lease L. None of the three leases transfers ownership of the equipment to Hazard at the end of the lease term. For each of the three leases, the present value of the lease payments at the beginning of the lease term, excluding that portion of the payments representing executory costs, is 75% of the fair value of the equipment to the lessor at the inception of the lease. Each piece of equipment has an expected economic life of 5 years.
The following information is peculiar to each lease:
Required:
1.
Explain the manner in which Company H should classify each of the preceding three leases explain the same.
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’.
Operating leases: In an operating lease lessor retains all ownership risks and responsibilities.
Capital leases: In capital lease all the ownership risks and responsibilities are transferred from the lessor to the lessee.
In case the lease is transferring “effective control” of the leased property by meeting any one of the four criteria established by GAAP then that lease is classified as a capital lease...
2.
Identify the amount that Company H should record as a liability at the inception of the lease for each of the preceding three leases.
3.
Explain the way Company H should record the expenses for each of the preceding three leases.
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