Leases
Leases
Kimberly McFarland
ACC 306 Intermediate Accounting II
Instructor Robert Neely
January 14, 2013
Leases Leases are used by companies and individuals to facilitate asset acquisition. They are accounted for in different ways, depending on whether they are operating leases or capital leases, and the type of financial report being generated. Residual value is important in accounting for leases and lease payment. Executory costs are accounted for as well, and are a consideration in the cost of the lease payments. Leasing arrangements can be complex and take a great deal of consideration by both the lessor and lessee before agreements are made. This paper defines a lease and how it is used as a financial vehicle, how leases are accounted for, the difference between capital and operating leases, and other factors, such as residual value and executory costs. A lease is a contractual arrangement between one party that provides the right to use an asset, for a specified amount of time and for a specified fee, to another party. The party providing the use of the asset is called the lessor, while the party leasing the asset is called the lessee. In lease arrangements, lessees agree to make stipulated, periodic cash payments during a time period specified within the lease agreement for the use of the lessor’s asset (Spiceland, Sepe, & Nelson, 2011, p. 808). There are many types of leases that people are familiar with, such as leases for buildings or apartments, equipment leases, and vehicle leases. As there are different types of leases, they all fall under different classifications of either operating leases or capital leases. Operating leases are short term agreement when fundamental rights and responsibilities of ownership are retained by the lessor and the lessee is simply using the asset temporarily. An apartment lease is a prime example of what is classified as an operating lease. Capital leases are arrangements that are
Kimberly McFarland
ACC 306 Intermediate Accounting II
Instructor Robert Neely
January 14, 2013
Leases Leases are used by companies and individuals to facilitate asset acquisition. They are accounted for in different ways, depending on whether they are operating leases or capital leases, and the type of financial report being generated. Residual value is important in accounting for leases and lease payment. Executory costs are accounted for as well, and are a consideration in the cost of the lease payments. Leasing arrangements can be complex and take a great deal of consideration by both the lessor and lessee before agreements are made. This paper defines a lease and how it is used as a financial vehicle, how leases are accounted for, the difference between capital and operating leases, and other factors, such as residual value and executory costs. A lease is a contractual arrangement between one party that provides the right to use an asset, for a specified amount of time and for a specified fee, to another party. The party providing the use of the asset is called the lessor, while the party leasing the asset is called the lessee. In lease arrangements, lessees agree to make stipulated, periodic cash payments during a time period specified within the lease agreement for the use of the lessor’s asset (Spiceland, Sepe, & Nelson, 2011, p. 808). There are many types of leases that people are familiar with, such as leases for buildings or apartments, equipment leases, and vehicle leases. As there are different types of leases, they all fall under different classifications of either operating leases or capital leases. Operating leases are short term agreement when fundamental rights and responsibilities of ownership are retained by the lessor and the lessee is simply using the asset temporarily. An apartment lease is a prime example of what is classified as an operating lease. Capital leases are arrangements that are