A. Firms with lower effective tax rates were found to have a higher proportion of leased debt to total assets than did firms with higher effective tax rates. Some lease agreements are in-substance long-term installment purchases of assets that have been structured to gain tax or other benefits to the parties. Since leases may take different forms, it is necessary to examine the underlying nature of the original transaction to determine the appropriate method of accounting for these agreements. That is, they should be reported in a manner that describes the intent of the lessor and lessee rather than the form of the agreement. B. Lani should account the lease as both an asset and a liability. Capital lease assets and liabilities are to be separately identified in the lessee’s balance sheet or in the accompanying footnotes. The liability should be classified as current and noncurrent on the same basis as all other liabilities, that is, according to when the obligation must be paid.
The amount to be recorded is acquired in one of two fashions either by listing the sum of the present value of the minimum lease payments at the inception of the lease, or by listing the fair value of the property at the inception of the lease. C. Lani will record the future value of cash flows ( 8 annual installments) as an asset and liability for the same amount. Also Lani will record interest expense on the lease installment paid, as well as depreciation on the asset. D. On the December 31 2006 balance sheet the fixed asset will show up on the asset side and the liability will be shown under current liability (payments due in the next 12 months) and balance as long-term liability. 13-5
A. In order for the Doherty Company to be able to classify the lease as a Capital lease, it must meet at least one of the following criteria: 1. Transfer of ownership at the end of the lease
2. Bargain purchase option