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Capital lease conditions and Audit Program for Leases

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What are the four conditions which determine whether a lease is an operating lease or a capital lease. Devise an audit program to test leases.

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Solution Summary

the response lists the four criteria to determine whether a lease should be capitalized or expensed as rent. The six step audit program defines the procedures for testing and gives the schedules to be prepared for data inclusion in the financial statement disclosures.

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A lease is capitalized if it meets any one of the following four conditions:

1. The present value of minimum lease payments is at least 90% of the asset's fair market value.
2. The lessee can acquire title to the asset at the end of the lease for a bargain price.
3. The lease term covers at least 75% of the useful life of the asset.
4. The lease transfers ownership to the lessee by the end of the lease term.

Capital leases are ...

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