Classification of Leases
Response to the following problem:
Part a. Capital leases and operating leases are the two classifications of leases for the lessee.
Required
1. Explain how a capital lease is accounted for by the lessee, both at the inception of the lease and during the first year of the lease, assuming the lease transfers ownership of the property to the lessee by the end of the lease.
2. Explain how an operating lease is accounted for by the lessee, both at the inception of the lease and during the first year of the lease, assuming equal monthly payments are made by the lessee at the beginning of each month of the lease. Describe the change in accounting, if any, when rental payments are not made on a straight-line basis.
Do not discuss the criteria for distinguishing between capital leases and operating leases.
Part b. Sales-type leases and direct financing leases are two of the classifications of leases for the lessor.
Required
Write a short report that compares and contrasts a sales-type lease with a direct financing lease as follows:
1. Gross investment in the lease.
2. Amortization of unearned interest income.
3. Manufacturer's or dealer's profit.
Do not discuss the criteria for distinguishing between the leases described above and operating leases.