ACC 305 Intermediate Accounting III Capital Leases and Operating Leases

May 19th, 2015
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Capital Leases and Operating Leases" Please respond to the following: Imagine you are the senior accountant at an organization and management is considering leasing some equipment; however, management is unsure of the impact that a capital lease would have on the company. Briefly describe the manner in which a capital lease would be accounted for by the company both at inception of the lease and during the first year of the lease, assuming that lease transfers ownership of the property to the lessee at the end of the lease. From the previous bulleted discussion, assume that management now has a clear understanding of capital leases, but has been informed by colleagues that an operating lease may be more beneficial than an operating lease, since the useful life for the equipment is only eight (8) years. Compare and contrast a capital lease and an operating lease, and recommend to management what type of lease would be beneficial since the equipment will become obsolete in eight (8) years

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Capital Leases and Operating LeasesThe inception of the capital leaseThe inception of the capital lease means that it must follow date of the agreement and should follow the following criteria which says that lessee will become automatically owner of the asset at the end of the lease term. The lease has an option of bargaining along with term of the lease which says that lease should be 75 percent more of the anticipated economic useful life of the capital asset. The last point is the present value of the least lease payment should be 90 percent or more of the value of the asset. The lessee will calculate the present value by his/her incremental borrowing rate to determine the implicit rate and also ensure that implicit rate is lower than the incremental rate In the 1st year of lease, lease inception has first payment of month, its tags and title fees along with the down payment, title and tag fees and a security deposit. All rest of the fess also apply whether they are official or non-officials. [Nonprofit accounting basic (2009)].Capital lease vs Operational leaseIn capital lease ownership is transferred to the lessee at the end whereas in operational lease own

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