Session- 12 Lease Accounting and Analysis

Lease is a contract of right to use an asset (Property or equipment) for a specified period in
exchange of cash payment. The owner is the lessor and the own who takes it on rent is the
lessee.

It can be an Acquisition or on Rental basis and the accounting varies between the lessors or
lessees financial statements.

Lessees Statements

Financial Accounting Standards board (FASB) SFAS, A lease contract that makes the lessee
the owner and transfers all the benefits and risks is called Capital leases and all other leases
are of rental and is Operational leases

Capital lease needs to meet any one of the criterias:

1. Title is transferred to the lessee by the end of the lease term

2. Lease contains bargain purchase option
3. The lease term is at least 75% of the economic life of the property
4. The present value of the minimum lease payment is 90% or more of the fair value of the
property

Recorded initially as an asset and a liability by the lessee

Examples:

Operational leases, Leases that do not meet the above criterions are often paid as rental. If the
rents are unequal, the rent is considered on the straight-line method.

Lessees capital Accounting Examples

1. Purchase of Equipment for $ 5000
Debit: Inventory of Equipment $5000
Credit: Cash $5000

2. Equipment Rented for 5 years under operating lease at $500/ month

Debit: Rental Expense $6000

Credit: Cash $6000

3. For a capital leased Equipment with yearly intallments

Debit: Capital leased Equipment $100000
Credit: Equipment Lease Obligation $100000
Transaction record after yearly Payment
Debit: Interest Expense $XXX
Debit: Equipment Lease Obligation $XX
Credit: Cash $XX +$XXX

Lessors Statements: Operating Lease of Equipment

1. Lessor gives the Equipment with book value $1000 on Operating Lease of $ 120 per year
with residual value $700 after 3 years.
First the Lessor purchase the Equipment and is in Inventory
Debit Inventory of Equipment $1000
Credit Cash $1000

Debit Leased Equipment $1000

Credit Inventory of Equipment $1000

Lease payment of $120 is received every year

Debit Cash $120

Credit Rental Revenue $120

Depreciation of the Equipment at 10% recorded every year

Debit Leased Equipment Depreciation $100

Credit Accumulated Depreciation $100

References