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Acc 422 Week 5 Reflection

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Differentiate between operating and capital leases
There are two primary types of leases: capital and operating.
Capital leases are non-cancelable, and must meet at least one of the following requirements: the lease transfers ownership of the asset, the lease contains a bargain purchase option, the duration of the lease is 75% or more of the asset's expected economic life and/or the lease is worth at least 90% of the asset's value. An operating lease is one that meets none of the criteria.
A capital lease is an example of accrual accounting's inclusion of economic events. Generally, companies have a choice of which type of lease they wish to use for accounting purposes, however, both types of leases provide specific advantages and disadvantages to financial statements. For example, companies wishing to show a higher return on asset ratios would choose an operating lease, as the balance sheet would not account for the item as an asset, thus reducing the denominator in the ratio.
Record leases from both the lessor and lessee perspectives
Lessee: The party who acquires use of the asset and must make lease payments. Leasing is a financing decision for the lessee.
A lessee should classify a lease transaction as a capital lease if it includes a noncancelable lease term and one or more of the following four criteria are met. Otherwise it is an operating lease and the agreement specifies that ownership of the asset transfers to the lessee. The agreement contains a bargain purchase option and the non-cancelable lease term is equal to 75% or more of the expected economic life of the asset. The present value of the minimum lease payments is equal to or greater than 90% of the fair value of the asset.

Lessor: The party who owns the asset and receives the lease payments in exchange for its use. Leasing is an investment decision for the lessor.
The collectability of

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