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Capital Lease versus Operating Lease

Distinguish between the accounting treatment of a capital lease versus an operating lease for a lessee both at the inception of the lease and during the first year of the lease (for the capital lease assume a transfer of ownership at the end of the first year of the lease).   Also, consider whether there is a change in accounting if terms of the operating lease require that rental payments not be made on a straight line basis.  Use a hypothetical situation if necessary

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Distinguish between the accounting treatment of a capital lease versus an operating lease for a lessee both at the inception of the lease and during the first year of the lease (for the capital lease assume a transfer of ownership at the end of the first year of the lease). Also, consider whether there is a change in accounting if terms of the operating lease require that rental payments not be made on a straight line basis.

CAPITAL LEASE VERSUS AN OPERATING LEASE

CAPITAL LEASE

A capital lease is viewed as an acquisition for accounting purposes. The asset acquired is listed on the lessee's balance sheet, and the lessee incurs depreciation expenses for the asset. In addition, the present value of the future lease payments is listed as a liability, and the interest portion of the lease payment is deducted as an interest expense.

At the inception, a Capital lease is recognized both as an asset ...

Solution Summary

This is an explination that distinguish between the accounting treatment of a capital lease versus an operating lease for a lessee both at the inception of the lease and during the first year of the lease. It also considers a change in accounting if terms of the operating lease require that rental payments not be made on a straight line basis.

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