1. How may the use of leases shift the risk of rising operating expenses from the less or to the lessee?
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Step 1: Leases can shift the risk of rising operating expenses from the lessor to the lessee by having the lessee pay a fixed lease payment. Show more…
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Rashmi S.
Why do you say we would prefer our leases to be classified as operating leases?" says your colleague in the accounting department. "I thought that with the new lease accounting rules, both operating and finance leases have to be included in our balance sheet." To aid in your explanation, you use Excel to chart the effect on the income statement of accounting for an upcoming lease transaction as a finance lease and as an operating lease. The transaction you're using in your explanation is a lease of equipment requiring four $100,000 payments, payable at the beginning of each of the four years. The payments are based on an interest rate of 10%. It's already been determined that you must classify the lease as a finance lease because the equipment's useful life is estimated to be six years, but you see this as a good opportunity to compare the two approaches. Below are the questions you will ask your colleague to consider when viewing the charts. 1. The interest expense of the finance lease in the third year of the four-year lease term is: 2. The amortization expense of the finance lease over the four-year lease term is: 3. The amortization expense of the operating lease over the four-year lease term is: 4. The total lease expense of the finance lease over the four-year lease term is: 5. The total lease expense of the operating lease over the four-year lease term is: 6. Other things being equal, the advantage of a lease being classified as an operating lease rather than as a finance lease is:
Manasvee S.
Effective December 15th, 2018, the operating leases will be recorded: A) as an asset and liability on the balance sheet of the lessee with a value equal to the estimated residual value of the leased asset. B) in the footnotes rather than on the balance sheet of the lessee. C) on the balance sheet of the lessee with value equal to the present value of future lease payments. D) only on the balance sheet and income statement of the lessor. E) only on the income statement of the lessee as each lease payment is expensed.
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