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Leases


In the previous chapter, we saw how companies account for their long-term debt. The focus of that discussion was bonds and notes. In this chapter we continue our discussion of debt, but we now turn our attention to liabilities arising in connection with leases. Leases that produce such debtor/creditor relationships are referred to as capital leases by the lessee and as either direct financing or sales-type leases by the lessor. We also will see that some leases do not produce debtor/creditor relationships, but instead are accounted for as rental agreements. These are designated as operating leases.



Identify and describe the operational, financial, and tax objectives that motivate leasing.

Explain why some leases constitute rental agreements and some represent purchases/sales accompanied by debt financing.

Explain the basis for each of the criteria and conditions used to classify leases.

Record all transactions associated with operating leases by both the lessor and lessee.

Describe and demonstrate how both the lessee and lessor account for a nonoperating lease.

Describe and demonstrate how the lessor accounts for a sales-type lease.

Explain how lease accounting is affected by the residual value of a leased asset.

Describe the way a bargain purchase option affects lease accounting.

Explain the impact on lease accounting of executory costs, the discount rate, initial direct costs, and contingent rentals.

Explain sale-leaseback agreements and other special leasing arrangements and their accounting treatment.





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