Individual Assignment - Week 5 - Acc 400

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Individual Assignment

ACC 400 – Accounting for Decision Making

Case 13-4 Application of SFAC No. 13 and Case 13-5 Lease Classifications

July 4, 2010

Individual Assignment – Week Five

Case 13-4 Application of SFAC Number 13

A -The Theoretical Basis for the Accounting Standard that requires

certain long-term leases to be capitalized by the lessee

Certain condition for specific long-term leases that is the theoretical basis for

accounting standards. The condition that must be met for capital leases are as follows.

1. The contract for the lease has to be put in possession of the lessee at the end

of the lease time frame if not before.

2. The lease contract includes an option to buy the assets at a lower price.

3. The time frame of the lease contract has to be at least 75% if not more of the

predicted period of the asset.

4. When the lease contract begins, the current amount of installments should be

around 90% of the fair amount of the asset being leased.

B –How should Lani account for this lease at its inception and a determination

made of the amount recorded?

Lanie should be able to see the documented fair or current value of the upcoming

installments as debit to fixed assets and also the capital lease as credit to obligation.

C - Expenses related to this lease Lani incurs during the first year

of the lease, and how will they be determined?

The expenditure related to the lease Lani will incur should be in the form of a

prepared amortization table with the principal amounts and interest clearly separated for

each of the installments. The interest should be documented as an expense just as

depreciation will be documented as an expense on the assets leased.

D - How should Lani report the lease transaction on its December 31,

2006, balance sheet?

The leased item on the December 31, 2006 balance sheet would be documented as

fixed assets as follows.

|Fixed Assets |Long-Term Liability |Current Liability | | | |The current part of the | | |Responsibilities or accountability |responsibilities or accountability is | |Lease Assets Depreciated at Cost Less|are answerable to capital lease, |answerable to finance lease, which | | |meaning the installments have to be |mean the installments have to be paid | | |paid after the first year |in the year following the first year. | | | | |

Case 13-5 Lease Classifications

A - What criteria must be met by the lease in order that Doherty Company

classify it as a capital lease?

The Doherty company has to meet certain criteria in the lease for the lease to be

classified as a capital lease. The first criteria is that the leased asset has to be able to be

transferred to the lessee by the end of the leasing period stated in the lease. A buy out

alternative has to be included in the lease with a substantially discounted cost as opposed

to the market value to the lessee on the date asset can be purchased. The lease time frame

has to be a minimum of 75% of the leased assets business related life. The current value

of the payments leased have to be the same or more than 90% of the fair amount and the

rate of interest to decrease the payments of the lease is less than the lessee’s accumulative

borrowing rate.

B - What criteria must be met by the lease meet in order that Lambert

Company classify it as a sales-type or direct...
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