Accounting

1. Case 13-4

1. 1.  What is the theoretical basis for the accounting standard that requires certain long-term leases to be capitalized by the lessee  Do not discuss the specific criteria for classifying a specific lease as a capital lease.

The theoretical basis for the accounting standard is capital lease is not a lease as popularly understood but in substance a purchase of property by the lessee from the lessor since the transfers substantially all the risks and rewards incident to ownership of the leased asset (Stickney, C.  et al, 2009).

1.2 How should Lani account for this lease at the inception and determine the amount to be recorded
The transaction would be recorded as an asset by Lani Company as lessee and said asset would be subject to depreciation. The amount to be recorded would be equal eight times the annual lease payment and discounting the same by an implicit interest rate or discount factor that is applicable (Stickney, C.  et al, 2009).

1.3 What expenses related to this lease will Lani incur during the first year of the lease, and how will they be determined
The expenses related to this lease that Lani will incur during the first year of the lease would include the
following  (a) Interest expense which would represent the difference between the fair value of gross rentals for eight years and the computed present value as basis for recording the asset. Said interest expense must however be amortized over the lease term (b) executor costs such as real estate taxes, insurance, and maintenance which may be determined in the lease contract signed by the parties and (c) depreciation, which will determined by dividing the recorded cost by the life of the asset or lease term whichever is shorter (Stickney, C.  et al, 2009).

1.3 How should Lani report to the lease transaction on its Dec 31, 2006 balance sheet
It should report the lease transaction as a non-current asset in its December 31 balance sheet at its carrying value or cost less accumulated depreciation for one year.

2. Case 13-5 Lease classifications

2.1 What criteria must be met by the lease in order that Doherty Company classifies it as a capital lease
Any of the following  criteria that must be met by Doherty Company, as lessee, in order to classify it as a capital lease (A)  Ownership is transferred by the end of the lease (B) Lessee has an option to purchase at the price lower than the fair value. (C) Lease term is at least 75 of the life of leased property and (D) The present value of minimum lease payment is at least 90  of the fair value of the leased property (CPAClass.com, 2010).

2.2 What criteria must be met by the lease in order that Lambert Company (lessor) classify it as a sales-type or direct financing lease
Any of criteria used by the lessee above should be met in the case of the lessor. In addition, two additional criteria must be met First, the collectability of the minimum lease payment must be reasonably predictable.  Second, there should be no important uncertainties about the additional cost to be incurred by the lessor and when such costs are not reimbursable (CPAClass.com, 2010).

2.3 Contrast a sales-type lease with a direct financing lease.
Under a sales-type lease, the lessor gets the manufacturer s or dealer s profit or loss when the fair value and carrying amount of the leased property varies.  On the other hand, the lessor under a direct financing lease does not get the manufacturer s or dealer s profit or loss when the fair value and carrying amount of the leased property varies.  It must be noted that a direct financing lease does not meet the leveraged leased criteria.  Under a leveraged lease, the lessor borrows the money and purchases the property and then leases the property to a lessee (CPAClass.com, 2010).