Assume a leesee leases equipment and insists on terms that qualify it as an operating lease,...

Assume a leesee leases equipment and insists on terms that qualify it as an operating lease, barely escaping the qualification as a capital lease. Discuss the impact that such an operating lease has on financial statements and related financial information as compared to the effect that a capital lease would have.
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Expert Solution

Operating Lease: It is a contract in which the lessor gives right to use an asset to the lessee. It is called "True Lease". Accounting of an operating lease is very simple. Lessee recognizes an expense when the lease payments are incurred and lessor recognizes income when the payments are due to be received.

Capital Lease:A capital lease has the economic characteristics of asset ownership for accounting purposes.Therefore, in a capital lease, the capital asset is transferred in the books of accounts of the lessee for accounting purpose.The lessor writes off the asset from his books of accounts.

Impact of a lease being treated as an operating lease as compared to capital lease.

1. The leased asset remains the asset of the lessor for accounting purpose.

2. The depreciation on the leased asset will be claimed by the lessor.

3. The cost of lease rentals will be treated as an expense for the lessee as a whole whereas in case of a capital lease,it is treated as a part of principal payment and interest payment.

ekkarill92 answered 9 months ago

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