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Accounting for Leases - Assignment Example

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The paper "Accounting for Leases" describes that in most of the leases the lessee enjoys the risks and rewards associated with the asset, thus classifying such leases as finance lease would require disclosure of Asset and Liability in the financial statements…
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Accounting for Leases
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Download file to see previous pages The classification needs to be made at the inception of the lease itself. Risk, with respect to leasing, refers to the possibility of loss arising on account of under-utilization or technological obsolescence of the asset. Reward means the incremental net cash flows that are generated from the usage of the asset over its economic life and the realization of the anticipated residual value on expiry of the economic life. A lease which cannot be classified as a finance lease is known as an operating lease. In the following situations a lease is classified as Finance lease:
The lower of the present value of minimum lease payments and the fair value of the asset is recognized as an asset and liability. The minimum lease payments are discounted at interest rate implicit in the lease. The Lease payments made to the lessor should be apportioned between the finance charge and reduction of outstanding liability. In the case of operating leases, the lease payments should be recorded as an expense in the Profit and Loss account over the period of lease term on a straight-line basis.
The amount of net investment in the lease by the lessor in case of a finance lease should be recorded as a Receivable in the financial statements. Finance income from a finance lease should be recognized as income so as to reflect a constant periodic rate of return on the lessor’s net investment outstanding. In case of an Operating lease, income is recognized over the period of lease on a straight-line basis.
2A sale and leaseback involves the sale of an asset and taking the same asset on Lease. The sale price and Lease payments are interdependent as they are negotiated together as a package. The transactions of a Sale and Leaseback system are accounted for based on the type of lease involved.
Accounting treatment of Leases in the books of Lessee depends on the nature of Lease. ...Download file to see next pagesRead More
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