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Lease which is done for the entire productive life of an asset is called "Capital lease or finance lease".

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What is the Difference between sales type lease and capital lease?

Capital lease is that lease in which assets are acquired for substantial useful life of asset for use in business. Sale type lease is that in which discounted cash flow for miminum lease payment is higher than value of leased asset and only relevant to lessor.


When should a lease be capitalized rather than expensed?

A lease should be capitalized rather than expensed when it meets certain criteria under accounting standards, such as ASC 842 or IFRS 16. Generally, this occurs when the lease transfers ownership of the asset to the lessee, includes a bargain purchase option, or has a term that covers the majority of the asset's useful life. Additionally, if the present value of lease payments exceeds a significant percentage of the asset's fair value, capitalization is required. Capitalizing the lease reflects it as both an asset and a liability on the balance sheet.


Describe how a lessee accounts for a capital lease both at interception of the lease and during the 1 year of lease?

At the inception of a capital lease, the lessee recognizes an asset and a corresponding liability on their balance sheet, both recorded at the present value of the lease payments. Over the course of the lease year, the lessee depreciates the leased asset and records interest expense on the lease liability. The depreciation expense is typically calculated on a straight-line basis or in accordance with the asset's useful life, while the interest expense is determined based on the outstanding liability. Lease payments made during the year reduce the principal amount of the liability.


The useful life of a plant asset is determined by law or by accounting rules or the length of time it is productively used or its productive life but not to exceed one year?

law


What are the three types of period costs that a lessee experiences with capital leases?

In a capital lease, a lessee experiences three types of period costs: depreciation expense, which reflects the wear and tear of the leased asset; interest expense, representing the cost of financing the lease; and any maintenance costs incurred to keep the asset operational. These costs are recognized over the lease term and impact the lessee's financial statements, affecting both the income statement and balance sheet. Together, they represent the total cost of using the leased asset over its useful life.

Related Questions

A plant asset's useful life might not be the same as its productive life?

An asset's useful life refers to the period over which it is expected to provide benefits, while its productive life refers to the period it actually remains in use and generates revenue. Differences could arise due to factors like technological advancements, changes in market demand, or maintenance practices that affect an asset's ability to remain productive beyond its expected useful life.


What is the Difference between sales type lease and capital lease?

Capital lease is that lease in which assets are acquired for substantial useful life of asset for use in business. Sale type lease is that in which discounted cash flow for miminum lease payment is higher than value of leased asset and only relevant to lessor.


What is the difference between operating lease and financial lease?

A finance lease is a form of financing that transfers substantially all the risks and rewards incidental to ownership over a leased asset from the lessor to the lessee. By signing the contract and delivering the leased asset, the lessor transfers economic ownership over the leased asset, while legal ownership is transferred only upon the expiration of lease, on payment of the final instalment. In a finance lease, the lessee uses the leased asset for most of its lifecycle, as with loans.An operating lease is a lease whereby all the risks and rewards incidental to ownership over the leased asset remain with the lessor. In this case, the lessor retains the economic and legal ownership over the leased asset, while the lessee has only right of use. Upon the expiration of contract, the leased asset is returned to the lessor. Under an operating lease, the lessee uses the leased asset for less than its useful life.


In Accounting what does Residual value mean?

Residual value estimates how much an asset is worth at the end of its productive life. This value is calculated by the lending institution prior to a lease or loan on an item. It is based on past and future predictions and is the key way of determining a payment schedule.


The useful life of a plant asset is determined by law or by accounting rules or the length of time it is productively used or its productive life but not to exceed one year?

law


Where are operating leases recorded in financial statements?

Operating lease is that kind of lease which is not done for entire useful life of assets and only lease rental are paid and expensed through income statement.


When is the cost of a long term assets expensed?

Cost of long term asset is expensed through depreciation in income statement for entire useful life of an asset.


Whose financial asset is the life estate the remainder or the life tenant?

Generally:The life estate is an asset of the life tenant.The property is an asset of the remainder.Generally:The life estate is an asset of the life tenant.The property is an asset of the remainder.Generally:The life estate is an asset of the life tenant.The property is an asset of the remainder.Generally:The life estate is an asset of the life tenant.The property is an asset of the remainder.


What is the operational leasing?

Operational lease is short-term lease and it normally does not cover the full economic life of the leased asset. The lessor bears all risks and rewards, connected with the ownership of the equipment, and provides to the lessee maintenance services for the leased machines and equipment. In terms of taxation, the lessee is entitled to deduct the full amount of the lease installment from its taxable profit.


What are the five primary types of leases and what are their characteristics?

Hi dear TYPES OF LEASE AGREEMENTS Lease agreements are basically of two types. They are (a) Financial lease and (b)Operating lease. (c) Sale and lease back (d) Leveraged leasing and (e) Direct leasing. 15.5.1 FINANCIAL LEASE Long-term, non-cancellable lease contracts are known as financial leases. The essential point of financial lease agreement is that it contains a condition whereby the lessor agrees to transfer the title for the asset at the end of the lease period at a nominal cost. At lease it must give an option to the lessee to purchase the asset he has used at the expiry of the lease. Under this lease the lessor recovers 90% of the fair value of the asset as lease rentals and the lease period is 75% of the economic life of the asset. The lease agreement is irrevocable. Practically all the risks incidental to the asset ownership and all the benefits arising there from are transferred to the lessee who bears the cost of maintenance, insurance and repairs. Only title deeds remain with the lessor. Financial lease is also known as 'capital lease'. In India, financial leases are very popular with high-cost and high technology equipment. OPERATIIONAL LEASEAn operating lease stands in contrast to the financial lease in almost all aspects. This lease agreement gives to the lessee only a limited right to use the asset. The lessor is responsible for the upkeep and maintenance of the asset. The lessee is not given any uplift to purchase the asset at the end of the lease period. Normally the lease is for a short period and even otherwise is revocable at a short notice. Mines, Computers hardware, trucks and automobiles are found suitable for operating lease because the rate of obsolescence is very high in this kind of assets. SALE AND LEASE BACK It is a sub-part of finance lease. Under this, the owner of an asset sells the asset to a party (the buyer), who in turn leases back the same asset to the owner in consideration of lease rentals. However, under this arrangement, the assets are not physically exchanged but it all happens in records only. This is nothing but a paper transaction. Sale and lease back transaction is suitable for those assets, which are not subjected depreciation but appreciation, say land. The advantage of this method is that the lessee can satisfy himself completely regarding the quality of the asset and after possession of the asset convert the sale into a lease arrangement. 4)LEVERAGED LEASING Under leveraged leasing arrangement, a third party is involved beside lessor and lessee. The lessor borrows a part of the purchase cost (say 80%) of the asset from the third party i.e., lender and the asset so purchased is held as security against the loan.The lender is paid off from the lease rentals directly by the lessee and the surplus after meeting the claims of the lender goes to the lessor. The lessor, the owner of the assetis entitled to depreciation allowance associated with the asset. 5 DIRECT LEASING Under direct leasing, a firm acquires the right to use an asset from the manufacturer directly. The ownership of the asset leased out remains with the manufacturer itself. The major types of direct lessor include manufacturers, finance companies, independent lease companies, special purpose leasing companies etc ============================ *****for more detail go to this link http://du.ac.in/course/material/ug/ba/esb/Lesson_15.pdf by Vimal Raval


Leasing can have a significance effect on the appearance of the firms financial statement such as return on asset.?

Yes, it can have a significant effect. It is part of capital budgeting which looks at the cost of leasing versus the cost of buying a new asset. In example, when leasing machinery, you enter into a contract, but you are generally not expected to pay for maintenance costs etc. Also, you do not take over ownership of the asset, so if you require it for only a short period of time it may actually be easier to get rid of. Furthermore, the lease repayments are tax deductible items, so by the end of the lease the entire cost of the lease has been deducted. When purchasing an asset you need to take into account the installation cost, salvage value etc. You can calculate the depreciation of the asset and there are varying ways of reducing depreciation, such as straight line depreciation (a percentage of the prime cost = original purchase cost) or diminishing value (generally a percentage per period). The depreciation will have a tax benefit attached to it, and the advantage of purchasing is ownership of the asset. You can make a gain (or a loss) when disposing of the asset by the end of its life. When performing calculations for both purchasing and leasing options, it can be determined what would be the most cost effective way. You will calculate the Net Present Value of both items for the total costs and income streams over the entire life of the asset.


What is asset lifespan?

Asset lifespan refers to the period of time during which an asset is expected to provide economic benefits to a company before it is no longer useful or productive. It is an important consideration in financial accounting and asset management, as it influences asset valuation, depreciation schedules, and overall financial planning. Tracking asset lifespan helps organizations make informed decisions about when to repair, replace, or dispose of assets to ensure optimal performance and return on investment.