a lease is a contractual arrangement between the lessor owner of the property and a 611042

This exercise reviews the characteristics and accounting aspects of the two types of leases.

A lease is a contractual arrangement between the lessor (owner of the property) and a lessee (renter of the property) that grants the lessee the right to use specific property for a period of time in return for cash payments. Some lease agreements are in substance installment purchases of assets by the lessees (and, thus, installment sales of the assets by the lessors), although their legal form is that of a lease.

The specific provisions of a lease contract may vary from other similar lease agreements. Generally accepted accounting principles require that each lease be properly classified as either a capital lease or an operating lease.

Instructions

Indicate whether each item below is most likely related to an operating lease or to a capital lease by using the appropriate code letters.

O = Operating Lease

C = Capital Lease

1. The lease is merely a short-term rental agreement for use of property.

2. The owner retains ownership of the leased property after the term of the lease and the property has substantial economic value after the lease has expired.

3.The lease is essentially an installment purchase of property by the lessee.

4. Rent expense appears on the lessee”s financial statements in the periods in which it is incurred.

5. Interest expense is reported on the books of the lessee.

6. Rental payments are considered to be an installment of the asset”s purchase price on the lessee”s books.

7. Depreciation expense for the leased asset is recognized on the lessee”s books.

8. Depreciation expense for the leased asset is not recognized on the lessee”s books.

9. The lease contract is recorded by a debit to an asset account and a credit to a liability account on the lessee”s books.

10. The leased asset appears on the books of the lessee.

11. The lessee uses up the total serviceability of the leased asset during the term of the lease.

12. The lessee has the right to buy the asset at the end of the lease term for a nominal purchase price.

13. The leased asset does not appear on the books of the lessee.

14. Present value of the minimum lease payments at the beginning of the lease term exceeds 90% of the fair value of the leased property at the inception of the lease.

15. End-of-the-period adjustments are made on the lessee”s books for any accrued rent not yet paid or any rent paid in advance.

16. The lease is considered to be a purchase of the leased asset by the lessee and a sale of the leased asset by the lessor.

17. The lease transfers ownership of the property to the lessee by the end of the lease term.