Anonymous
Apr 18
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Apr 18
1. Ownership: The lessee assumes ownership of the asset at the end of the lease term.
2. Bargain purchase option: The lease agreement includes a provision allowing the lessee to purchase the asset at a price significantly below its fair market value.
3. Lease term: The lease term is for a significant portion of the asset's useful life, typically 75% or more.
4. Present value of lease payments: The present value of the lease payments is equal to or exceeds 90% of the fair market value of the asset.
5. Maintenance and insurance: The lessee is responsible for maintenance and insurance of the asset during the lease term.
6. Depreciation: The lessee records the leased asset as a fixed asset on its balance sheet and depreciates it over its useful life.
7. Non-cancellable: The lease agreement cannot be cancelled by the lessor without significant penalties.
2. Bargain purchase option: The lease agreement includes a provision allowing the lessee to purchase the asset at a price significantly below its fair market value.
3. Lease term: The lease term is for a significant portion of the asset's useful life, typically 75% or more.
4. Present value of lease payments: The present value of the lease payments is equal to or exceeds 90% of the fair market value of the asset.
5. Maintenance and insurance: The lessee is responsible for maintenance and insurance of the asset during the lease term.
6. Depreciation: The lessee records the leased asset as a fixed asset on its balance sheet and depreciates it over its useful life.
7. Non-cancellable: The lease agreement cannot be cancelled by the lessor without significant penalties.
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Google Gemini AI
Apr 18
Characteristics of a Capital Lease
- Conveys substantially all the risks and rewards of ownership to the lessee: The lessee takes on most of the financial and operational responsibilities associated with the leased asset.
- The term of the lease is greater than 75% of the asset's estimated economic life: This indicates that the lease is effectively a transfer of ownership to the lessee.
- The present value of the lease payments is greater than 90% of the asset's fair market value: This further suggests that the lessee is essentially acquiring ownership of the asset.
- The lessee has the option to purchase the asset at a price that is significantly lower than the fair market value: This gives the lessee an incentive to end the lease and take full ownership of the asset.
- The lessee must record the leased asset and the related lease liability on its balance sheet: This reflects the fact that the lessee has acquired an asset and incurred a liability.
- Lease payments are amortized over the lease term: This allows the lessee to spread the cost of the leased asset over its useful life.
- Interest expense is recognized on the lease liability: This reflects the time value of money associated with the lease payments.
- Depreciation expense is recognized on the leased asset: This reduces the carrying value of the asset over its useful life.
- Financial ratios may be impacted: Capital leases can affect various financial ratios, such as debt-to-equity ratio and return on assets.
- Compliance with accounting standards (e.g., IFRS 16 or ASC 842): Companies must follow specific accounting standards when classifying and accounting for capital leases.
- Conveys substantially all the risks and rewards of ownership to the lessee: The lessee takes on most of the financial and operational responsibilities associated with the leased asset.
- The term of the lease is greater than 75% of the asset's estimated economic life: This indicates that the lease is effectively a transfer of ownership to the lessee.
- The present value of the lease payments is greater than 90% of the asset's fair market value: This further suggests that the lessee is essentially acquiring ownership of the asset.
- The lessee has the option to purchase the asset at a price that is significantly lower than the fair market value: This gives the lessee an incentive to end the lease and take full ownership of the asset.
- The lessee must record the leased asset and the related lease liability on its balance sheet: This reflects the fact that the lessee has acquired an asset and incurred a liability.
- Lease payments are amortized over the lease term: This allows the lessee to spread the cost of the leased asset over its useful life.
- Interest expense is recognized on the lease liability: This reflects the time value of money associated with the lease payments.
- Depreciation expense is recognized on the leased asset: This reduces the carrying value of the asset over its useful life.
- Financial ratios may be impacted: Capital leases can affect various financial ratios, such as debt-to-equity ratio and return on assets.
- Compliance with accounting standards (e.g., IFRS 16 or ASC 842): Companies must follow specific accounting standards when classifying and accounting for capital leases.
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