Question

a.) When should a leased asset (perspective of lessee) be depreciated over its lease term ? Over it's economic life?

b.) And when should a leased asset be amortized ? What is the difference between amortizing the leased asset and depreciating it ?

Answer 1

1. The leasd Asset be depreciated over its lease term it must be depreciated in the normal manner, where periodic depreciation is based on a combination of the recorded asset cost, any salvage value, and its useful life. For example, if an asset has a cost of $100,000, no expected salvage value, and a 10-year useful life, the annual depreciation entry for it will be a debit of $10,000 to the depreciation expense account and a credit to the accumulated depreciationaccount.

As per AS-19 on leases provide that the Depreciation shall be claimed by the Lessee in case of Finance Lease and by the Lessor if it is in the nature of the Operating Lease.

2.An leased is amortized only when it is a capital lease that means it is a lease in which the lessor only finances the leased asset, and all other rights of ownership transfer to the lessee. This results in the recordation of the asset as the lessee's property in its general ledger, as a fixed asset.

The key diffrences between amortization of leased asset and depreciation asset is that amortization is done on capital assets and depreciation on capital and finance lease

another main diffrence is under amortization the it is concerned with only lease payments but under depreciation it is concerned of whole leased asset