Discussion Questions

Discussion Questions
Name
Institution
1. What are the four criteria used for determining if a lease is to be treated as a capital lease?
The four criteria which are used in determining whether a lease should be treated as a capital lease include;
If the ownership in the transferred asset to lease at the end of the lease
If the lease has a bargain purchase option
If the lease term more than 75% of the asset life, and
If the current value of the Minimum lease payments ( MLP) is more than 90% of the leases property fair value at the lease inception.
In case of a capital lease, the records present the future cash flow value as recognized expenses and revenue. The received lease appears on the balance sheet as an asset and the interested revenue recognized over the period of the lease as being paid. When it comes to tax, the tax benefits can only be claimed on the leased asset if it is an operating lease, however, the revenue code makes use of a different approach in determining if the lease is an operating leases (McGregor, 2006)
When classified as an operating lease, the expenses are recorded as operating expenses and the operating lease does not appear as part of the firm’s capital. When classified as capital lease, the current value of the lease expenses is recorded as a debt and the interest is included on this amount and recorded on the income statement. Classifying operating leases to be capital lease increases the debt appearing on the balance sheet substantially.
2. How much confusion do you personally think is caused by the various lease accounting treatments and why do you thinkthis?
The confusion mostly arises on the changes that affect financial reporting where the use of dual-recognition come up with two lease transaction types; a Type A l...