Capital and Operating Leases

Project Scenario

Hi, I'm Jan Waters, the controller for Calliope Knowledge Solutions. Welcome to the company. It's good to have you with us. I wanted to talk to you about your new project.
As you know, Calliope provides professional education courses. Our top priorities are to offer a low cost product, and exceed market competition and product innovation and customer service.

Our students are busy and need to balance home, work, and other commitments. Through feedback and surveys, we learned that students want courses they can access any time: days, nights, and weekends.

To accommodate this, we recently started offering Internet-based courses. These courses allow our students to learn on their schedule; they are no longer tied to a traditional classroom.

It's important that we respond to our customers, and offer innovative products that suit their needs. In addition, Internet-based education allows us to further enhance revenue and cash flows and tap into an international demand for continuing professional education.
The courses have become very popular...so much so, in fact, that we have higher than anticipated demands for online enrollment and course rollouts. While this is a very positive development for Calliope, it means we have a lot of issues to look at.

Several potential expansion plans are currently being developed and we hope to implement one soon.

This is where your role as a financial analyst comes in. Evelyn Stanfill, our CEO, has requested an overview of how these plans will affect the company's financial statements. We need to see how our balance sheet, income statement, statement of cash flows, and statement of shareholder's equity will be affected by an expansion.

Depending on which expansion method we choose, the financial reports we send to our shareholders next year could look very different.

Once you have finished the overview, I will review your work, then go over it with our vice-president of finance, Connie Esmond. Connie will then present the data to Evelyn.
I hope you're looking forward to this project. We're glad to have your help with this next step in Calliope's development.

Write an e-mail to Jan Waters describing how Calliope's accounts and financial statements would be affected if the company decides to lease the noncurrent assets needed to expand the business. Your e-mail should answer the following questions:

? Which accounts are affected by the leasing of an asset when it is classified as an operating lease?
? Which accounts are affected by the leasing of an asset when it is classified as a capital lease? Discuss the initial entry, the first lease payment, subsequent lease payments, and the recording of amortization.
? How are the income statement, balance sheet, and statement of cash flows affected by leasing of an asset classified as an operating lease?
? How are the income statement, balance sheet, and statement of cash flows affected by the leasing of an asset classified as a capital lease? Discuss the initial entry, the first lease payment, subsequent lease payments, and the recording of amortization.