Question

Canin Cranes Co. leased an asset under the following terms:

Annual lease payments	$7,500
Asset's estimated useful life	8 years
Bargain purchase option	none
Asset's fair market value	$65,000
Transfer of title at end of lease	none
Lease term	4 years
Present value of lease payments	$35,500

a)

The lease should be classified by Canin Cranes Co. as a(n) A) operating lease. B) commercial lease. C) leveraged lease. D) finance lease.

b

46.	Assume Canin Cranes decides to account for the lease as a finance lease. The lessee's entry to record the leased asset and lease acquired would include a
	A)	debit to asset under lease for $35,500.
	B)	debit to asset under lease for $40,000.
	C)	credit to obligation under finance lease for $7,500.
	D)	credit to lease payable for $7,500.

Answer 1

a) In operating lease, risk and rewards are not transferred completely to the lessee. The term of a lease is very small compared to the finance lease. In operating lease, ownership along with its risks and rewards lies with the lessor. It is like renting the asset to the lessee.

b) Commercial lease relates to renting of property for business or other commercial purpose.

c) In Leveraged lease, the lessor arranges the money to finance the asset from a financer. The financer is entitled to recover money from the lessor only and not from the lessee in case of default by a lessor. Lessee is entitled to pay the lease rentals only to the lessor.

d) Finance lease is a type of lease wherein the lessor transfers substantially all the risks and rewards related to the asset to the lessee. Generally, the ownership is transferred to the lessee at the end of the useful life of the asset. The lease term is spread over the major part of the asset useful life. Hence, Lessor is just like a financer.

Based on the above criteria, we should classify the lease as operating lease since lease does not cover the majority of the life of the assets and also does not give the lessee to buy the asset at the end of lease period.

Asnwer b. Canin Cranes decides to account for the lease as a finance lease then it would results in recognition of both an asset and liability in the books of Canin Cranes equal to the present value of lease payments. Entry would be :

Leased Asset $35,500

Lease Liability $ 35,500

Hence, correct answer would be (A),