Anonymous
Apr 18
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Apr 18
1. Ownership transfer: The lessee has the option to purchase the asset at the end of the lease term at a predetermined price.
2. Long-term commitment: Capital leases are typically long-term leases, with lease terms that are usually close to the useful life of the asset being leased.
3. Non-cancellable: Capital leases are usually non-cancellable, meaning that the lessee is obligated to make lease payments for the entire lease term.
4. Maintenance and insurance: The lessee is responsible for maintaining and insuring the leased asset, as they are considered the owner of the asset for accounting purposes.
5. Depreciation: The lessee is required to record the leased asset on their balance sheet and depreciate it over its useful life.
6. Interest expense: The lessee must also record interest expense on the lease liability, which represents the cost of borrowing the funds to finance the lease.
7. Bargain purchase option: Capital leases often include a bargain purchase option, which allows the lessee to purchase the asset at the end of the lease term for a price significantly lower than the fair market value of the asset.
8. Economic life: The lease term is usually for a significant portion of the economic life of the asset, indicating that the lessee intends to use the asset for most of its useful life.
2. Long-term commitment: Capital leases are typically long-term leases, with lease terms that are usually close to the useful life of the asset being leased.
3. Non-cancellable: Capital leases are usually non-cancellable, meaning that the lessee is obligated to make lease payments for the entire lease term.
4. Maintenance and insurance: The lessee is responsible for maintaining and insuring the leased asset, as they are considered the owner of the asset for accounting purposes.
5. Depreciation: The lessee is required to record the leased asset on their balance sheet and depreciate it over its useful life.
6. Interest expense: The lessee must also record interest expense on the lease liability, which represents the cost of borrowing the funds to finance the lease.
7. Bargain purchase option: Capital leases often include a bargain purchase option, which allows the lessee to purchase the asset at the end of the lease term for a price significantly lower than the fair market value of the asset.
8. Economic life: The lease term is usually for a significant portion of the economic life of the asset, indicating that the lessee intends to use the asset for most of its useful life.
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Google Gemini AI
Apr 18
Characteristics of a Capital Lease:
- Transfers ownership of the asset: The lessee (who has use of the asset) becomes the eventual owner of the asset at the end of the lease term.
- Substantially all of the risks and rewards of ownership: The lessee assumes most of the risks and rewards associated with asset ownership, including depreciation, maintenance costs, and obsolescence risk.
- Lease term close to economic life of asset: The lease term is typically close to the economic life of the asset.
- Present value of lease payments approx. equals fair value of asset: The present value of the lease payments is approximately equal to the fair value of the asset at the inception of the lease.
- Repayment schedule similar to installment loan: The lease payments are structured similar to installment loan payments, with a significant portion of the payments going towards reducing the principal balance.
- Depreciation of asset: The lessee records the asset on its balance sheet and depreciates it over the lease term.
- Interest expense on lease obligation: The lessee recognizes interest expense on the portion of lease payments that are attributable to financing the asset.
- Liability for the lease obligation: The lessee has a liability on its balance sheet for the remaining lease obligation.
- Accounting treatment: Capital leases are treated as debt on the lessee's financial statements, resulting in an increase in both assets and liabilities.
- Tax consequences: Capital lease payments may be tax-deductible for the lessee and treated as taxable income for the lessor.
- Transfers ownership of the asset: The lessee (who has use of the asset) becomes the eventual owner of the asset at the end of the lease term.
- Substantially all of the risks and rewards of ownership: The lessee assumes most of the risks and rewards associated with asset ownership, including depreciation, maintenance costs, and obsolescence risk.
- Lease term close to economic life of asset: The lease term is typically close to the economic life of the asset.
- Present value of lease payments approx. equals fair value of asset: The present value of the lease payments is approximately equal to the fair value of the asset at the inception of the lease.
- Repayment schedule similar to installment loan: The lease payments are structured similar to installment loan payments, with a significant portion of the payments going towards reducing the principal balance.
- Depreciation of asset: The lessee records the asset on its balance sheet and depreciates it over the lease term.
- Interest expense on lease obligation: The lessee recognizes interest expense on the portion of lease payments that are attributable to financing the asset.
- Liability for the lease obligation: The lessee has a liability on its balance sheet for the remaining lease obligation.
- Accounting treatment: Capital leases are treated as debt on the lessee's financial statements, resulting in an increase in both assets and liabilities.
- Tax consequences: Capital lease payments may be tax-deductible for the lessee and treated as taxable income for the lessor.
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