Saturday, July 11, 2009

lessee Accounting for capital leases

If the leasee is a capital lease, the lessee will account for this transaction in two parts. The first is the purchase of fixed asset and the second in the obtaining and repayment of a loan.
This means that the asset itself will be recorded on the books of the lessee (and the lessee will remove the asset from their books). The first calculation that needs to be made is the amount at which the asset will be recorded on their books. The lessee then must depreciate the asset and this will be done in the same way as other similar assets owned by the lessee.
The lessee also must account for the loan (or financing) part of this transaction. this is done as if the lessee is financing the purchase for the lessor. The lessee records a payable and each period will make a payment on this amount. Part of each payment made by the lessee will be recorded as interested expense, while
the remainder will be the reduction of the lease payable itself. (This is very similar to the accounting approach for bonds payable.)
This means that the lessee will:
1-Recorded a fixed asset on their books.
2-Depreciate that asset
3- recorded a payable representing their future lease payment, and because they have received a loan to purchase this asset from the lessor, the lessee will also need to recognize interest expense as the part of the lease payment each period.
Like the case with bonds, the amount of interest that is expensed on the income statement will be calculated from the amount of the loan that is still outstanding each period. This means that each period when a payment is made, part of the it is payment of interest and part of it is the reduction of the lease payable itself.
The lessor will need to do the following:
1- Remove the fixed assets from their books.
2- recognize revenue from the sale of the assets.
3- recognize a gain or a loss on the sale.
4- recoded a receivable, and recorded interest revenue each time a payment is received from the lessee

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