Leases

Question 1

What are the criteria for determining if a lease should be capitalized? (LESSEE)

Answer 1

1. Transfer of ownership
2. Bargain purchase option
3. Lease term is at least 75% of the remaining estimated useful life of the asset
4. The present value of the minimum lease payments is at least 90% of the market value of the asset.

Question 2

What additional criteria must the leasor meet to capitalize a lease?

Answer 2

1. No material cost uncertainties

2. Collectibility of the minimum lease payments is reasonably assured.

Question 3

What are the two types of capital leases?

Answer 3

1. Direct financing lease

2. Sales type lease

Question 4

What is the differentiating factor between capital leases?

Answer 4

Direct financing lease have no gross profit on the lease. (Book value of asset equals market value) Sales type leases do.