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Accounting For Leases: Types of Leases

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Identify the two recognized lease accounting methods for lessees and compare them.

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This solution helps with a finance problem. It helps identify two recognized lease accounting methods for lessees and distinguish between them.

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A lease is generally considered to be a contract for the use of another entity's property. There are two types of leases.

A capital lease is one entered into for a relatively long period of time. Generally, entities enter into these contracts for one of two reasons. First, they cannot or do not want to obtain formal financing from a financial institution. In this case, leasing is really a proxy for buying the asset, but without the formal liability. Alternatively, they lease assets in hopes that they can deduct the full amount of the "rent" on their taxes. Unfortunately for these people, both the Financial Accounting Standards Board and the Internal Revenue Service recognize that these leases are really proxies for purchases. Using the ...

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