Problem Solving Survival Guide for Intermediate Accounting, 15th Edition, Instructor's Manual: Volume II: Chapters 15-24

CHAPTER 21

ACCOUNTING FOR LEASES

OVERVIEW

Many entities lease assets. Leasing will often offer tax and cash flow advantages when compared to the purchase of these assets. Some leases are pure rentals; others are, in substance, an installment purchase of the asset by the lessee. This chapter will discuss both operating and nonoperating type leases but will focus on the nonoperating type where we must account for substance over form. That is, even though it is legally a rental situation, in substance the transaction is an installment purchase of the asset by the lessee and an installment sale of the asset by the lessor.

SUMMARY OF LEARNING OBJECTIVES

  1. Explain the nature, economic substance, and advantages of lease transactions. A lease is a contractual agreement between a lessor and a lessee that conveys to the lessee the right to use specific property (real or personal), owned by the lessor, for a specified period of time. In return for this right, the lessee periodically pays cash (rent) to the lessor. The advantages of lease transactions are: (1) 100% financing, (2) protection against obsolescence, (3) flexibility, (4) less costly financing, (5) possible tax advantages, and (6) off-balance-sheet financing.

  2. Describe the accounting criteria and procedures for capitalizing leases by the lessee. A lease is a capital lease if it meets one or more of the following four (Group I) criteria: (1) The lease transfers ownership of the property to the lessee. (2) The lease contains ...