Question :
On 1st January, 2006, Lani Company entered into a no cancelable lease for a machine to be used in its manufacturing operations. The lease transfers ownership of the machine to Lani by the end of the lease term. The term of the lease is 8 years. The minimum lease payment made by Lani on 1st January, 2006, was one of 8 equal annual payments. At the inception of the lease, the criteria established for categorization as a capital lease by the lessee were met.
Required:
Determine the theoretical basis for the accounting standard that needs certain long-term leases to be capitalized by the lessee? Do not show the specific criteria for classifying a specific lease as a capital lease.
How could Lani account for this lease at its inception and evaluate the amount to be recorded?
What expenses related to this lease can Lani incur through the first year of the lease, and how will they be determined?
How could Lani report the lease transaction on its 31st December, 2006, balance sheet?
Doherty Company leased equipment from Lambert Company. The categorization of the lease prepares a difference in the amounts reflected on the balance sheet and income statement of both Doherty and Lambert.
What criteria have to be met by the lease in order that Doherty Company classifies it as a capital lease?
What criteria has to be met by the lease meet in order that Lambert Company categorize it as a sales-type or direct financing lease?
Contrast a sales-type lease with a direct financing lease.