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How do you Account for Imputed Interest in Capital Lease?
Imputed interest in a capital lease is accounted for by recognizing the lease obligation as a liability on the balance sheet and recording the right-of-use asset. The lease liability is measured at the present value of future lease payments, discounted using the implicit interest rate of the lease or the lessee's incremental borrowing rate. Over the lease term, the imputed interest is recognized as an expense in the income statement, typically using the effective interest method, which allocates interest expense over the lease term based on the declining balance of the liability. This ensures that the financial statements reflect the cost of financing the leased asset accurately.
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.
A lease of an asset for its entire productive life?
Lease which is done for the entire productive life of an asset is called "Capital lease or finance lease".
How do you calculate the capital lease obligation?
When you book the capital lease, record the asset at its fair market value or the present value of minimum lease payments, whichever is less. The capital lease obligation is recorded at the same amount. Minimum lease payments include all rental payments required during the term of the lease plus any residual value guaranteed by the lessee. They also include any payment the lessee must make for not renewing or extending the lease, including a requirement to purchase the asset. They do not include any guarantee of the lessor's debt by the lessee, contingent rentals, or any penalty for which the term of the lease has been extended. They also do not include the portion of the rent payments which represent executory costs, such as insurance, taxes, and maintenance, and any related profit. The interest rate used to calculate the present value of the minimum lease payments is normally your incremental borrowing rate (the interest rate you would pay to borrow a similar amount of money for a similar length of time), unless you know the lessor's implicit interest rate for the lease and that is lower than your incremental borrowing rate. Sources: SFAS No. 13; RIA Checkpoint
In what circumstances is a capital lease a better alternative to an operating lease and under what circumstances is a clapital lease a better alternative than buying an asset?
1) When you do not need a current tax deduction, a capital works better, you can take depreciation over the term of the lease. 2) You buy a appreciating asset and lease a depreciating asset, A capital lease is better with a depreciating asset. http://www.equipmentleasing101.com
How do you Account for Imputed Interest in Capital Lease?
Imputed interest in a capital lease is accounted for by recognizing the lease obligation as a liability on the balance sheet and recording the right-of-use asset. The lease liability is measured at the present value of future lease payments, discounted using the implicit interest rate of the lease or the lessee's incremental borrowing rate. Over the lease term, the imputed interest is recognized as an expense in the income statement, typically using the effective interest method, which allocates interest expense over the lease term based on the declining balance of the liability. This ensures that the financial statements reflect the cost of financing the leased asset accurately.
What is the difference between a financing lease and a capital lease?
A financing lease occurs through a bank/lending institution where payments are made that charge interest. A capital lease is usually a lump sum of money put up by the buyer or an investor to secure the property based on the terms of the lease for a given period.
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.
Lease rent paid during construction - capitalize or expense?
expenses
What is lease obligation?
it is lease paid on capital invested
Capital lease and financing lease are the same thing?
Finance lease and operating lease are different things.
How do you calculate amount of interest in Finance lease?
To calculate the amount of interest in a finance lease, first identify the total lease payments and the present value of the lease liability. The interest expense can be determined by applying the interest rate to the outstanding balance of the lease liability at the beginning of each period. Typically, the interest for the period is calculated as the outstanding principal at the start of that period multiplied by the interest rate, and this amount is deducted from the lease payments to find the principal repayment for that period.
If the lessee and lessor use different interest rates to account for a capital lease then total expenses for the lessee will be different from the lessor's total revenues?
yes
Are cost of capital and marginal tax rate included on a cash flow statemnt?
Capital lease payments will affect cash flow from both operating activities and financing activities. A capital lease payment is treated as debt service. The portion of the payment applied to principal is a cash outflow from financing activities, and the portion applied to interest is a cash outflow from operating activities.
If the lease factor is given as 0.0016 what interest rate is that equivalent to?
The lease factor is typically a monthly rate used to calculate lease payments based on the vehicle's value and residual value. To convert a lease factor to an annual interest rate, you can use the formula: Interest Rate = Lease Factor × 12 × 100. Therefore, if the lease factor is 0.0016, the equivalent annual interest rate would be approximately 1.92% (0.0016 × 12 × 100).
What is tax advantage of Capital lease?
A capital lease allows the lessor to take advantage of the accelerated depreciation methods, and/or the bonus first-year expensing method (e.g. section 179 deduction) for the leased asset. The lessor also gets to deduct the interest portion of the lease payments, which is greatest at the beginning of the lease. Theoretically, the aggregate deductions over the life of the lease should be equal. Thus, the lessor gets the benefit of accelerated deductibility, and therefore the desirable time value of money.
A lease of an asset for its entire productive life?
Lease which is done for the entire productive life of an asset is called "Capital lease or finance lease".
