Chapter 23.10 Essay

993 words - 4 pages

Assignments from the Readings

Sonia Napier

ACC/400

November 9, 2010
Gentian Mataj

Assignments from the Readings

Case 13-4 Application of SFAC No. 13

On January 1, 2006, Lani Company entered into a noncancelable lease for a machine to be used in its manufacturing operations. The lease transfers ownership of the machine to Lani by the end of the lease term. The term of the lease is eight years. The minimum lease payment made by Lani on January 1, 2006, was one of eight equal annual payments. At the inception of the lease, the criteria established for classification as a capital lease by the lessee were met.

Required:

   1. What is the theoretical basis for the ...view middle of the document...

  In addition, Lani will incur an expense relating to depreciation of the capitalized cost of the leased asset.  This depreciation should be based on the estimated useful life of the leased asset and depreciated in a manner consistent with Lani's normal depreciation policy for owned assets.

   4. How should Lani report the lease transaction on its December 31, 2006, balance sheet?

The asset recorded under the capital lease and the accumulated depreciation should be reported on Lani's December 31, 2006 balance sheet classified as noncurrent and should be separately identified by Lani in its balance sheet or notes thereto.  The related obligation recorded under the capital lease should be reported on Lani's December 31, 2006 balance sheet appropriately classified into current and noncurrent categories and should be separately identified by Lani in its balance sheet.

Case 13-5 Lease Classifications

Doherty Company leased equipment from Lambert Company. The classification of the lease makes a difference in the amounts reflected on the balance sheet and income statement of both Doherty and Lambert.

Required:

   1. What criteria must be met by the lease in order that Doherty Company classify it as a capital lease?

For Doherty Company to classify the lease as a Capital Lease, it must meet one or more of the following criteria:
1. Transfer of ownership at end of lease
2. Bargain purchase option
3. Lease term is 75% or more of the estimated economic life of the asset
4. Present value of minimum lease payments is 90% or more of fair value of the
leased property to the lesser.
 
   2. What criteria must be met by the lease meet in order that Lambert Company classify it as a sales-type or direct financing lease?

For Lambert Company to classify the lease as a sales-type or direct financing lease, it must meet one or...

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