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Accounting For Leases 2

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Running head: ACCOUNTING FOR LEASES Leasing Decision at Magnet Beauty Products, Inc. Student’s Name Institutional Affiliation 1 ACCOUNTING FOR LEASES 2 Introduction A lease is form of legal agreement that enable one lessee to possess assets belonging to another company called the lessor for specified period of time for money consideration. The asset may be land, house, vehicle or intellectual property. IAS 17 define lease as a contract or part of contract that conveys a right to use the asset for period of time in exchange for consideration. (Webb, 2) There are two option to consider in this case study, either 1-year option (Option A) or 5years’ option (Option B). For Option A, rent will be recorded as an operating lease, and the price will increase by 5%, while on the other hand the Option B the rent expense will not be recorded and the rental rate will remain 10 million for the five years. The second argument is that interest on debts will be lower on Option B and higher on Option A because the company will have to borrow more to finance the negative cash flows under Option A. When Option A is selected, there will be no interest in the lease; on the contrary, the Option B requires that the interest is recorded which is attributed to lease payment liability. Which is a substitute for rent payment under Option A. This means that Option B will use the Amortization expense rather than the rent expense in the income statement.(Sarens, 158) Income Statement Analysis Yea ...
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