Doherty Company: Capital lease and sales type lease
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Doherty Company leased equipment from Lambert Company. The classification of the lease makes a difference in the amounts reflected on the balance sheet and income statement of both Doherty and Lambert.
a) What criteria must be met by the lease in order that Doherty Company classify it as a capital lease?
b) What criteria must be met by the lease in order that Lambert Company classify it as a sales-type lease or direct financing lease?
c) Contrast a sales-type lease with a direct financing lease.
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Solution Summary
The answer contains the meaning of lease, capital lease, FASB statement No:13, sales type lease and direct financing lease. The answer also contains the difference between the sales type lease and direct financing lease.
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Answer to question no: 1
Lease means:
Lease confers powers/rights on one person called lessee to possess the property belonging to the lessor. Lease is for shorter period of time or it can be ended shortly. The consideration for lease is called rent.
Capital lease:
Capital lease means is a type of lease which effectively allows a firm to finance the purchase of an asset and the lessee will be given the right to purchase the asset at the end of the lease period at the bargain price .Therefore, a finance lease will give the lessee control over an asset for a large proportion of the asset's useful life, providing them the benefits and risks of ownership. Conditions to be followed for treating the lease as capital lease.
1. The lessee has the right to use the asset for the majority of the life of the asset.
2. There ...
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