Leasing Essay Example | Topics and Well Written Essays - 1250 words

Leasing - Essay Example This is a long term purchase where the price value should be substantially lower than the market value which determines the amount to be recorded. c. During the first year of the lease, Lani is expected to incur expenses that equals or exceeds at least 90 per cent of the fair value of the property that is leased. Basically, these expenses are determined by the value of the property at inception of the lease and this value is agreed by both the lessee and lessor. d. Lani should report the lease transaction on its December 31, 2006, balance sheet as an acquisition of an asset. Virtually, a lease agreement transfers ownership of property to the lessee and this should be reflected on the balance sheet as purchase of assets which adds property value to the company. 2a. The criteria that must be met by Doherty Company to classify it as a capital lease is that it must transfer substantially all of the benefits and risks of the ownership of property to the lessee. If the agreement transfers the property rights to the lessee, then it will be classified as a capital leases given that it will be an acquisition of the property by the lessee. In this particular case, Doherty Company should transfer ownership to the lessee in order for it to classify it as a capital lease. b. In order for Lambert Company to classify the lease as a sales-type, it must be able to realise a profit from the lease or be able to determine if it is making a loss. In actual fact, Lambert Company as the lessor must be better positioned to generate some revenue that can contribute to the profit margins of the organisation. Lambert Company can classify this lease as direct financing lease if it does not record any profit from the lease. It will be widely viewed as a lending institution. c. The main difference between a sales type lease and a direct financing lease is that the main reason behind a sales lease is to realise profits while direct financing is not primarily concerned with profits but just r evenue generation. Therefore, the purpose of the lease and the goals to be achieved are the major factors that make a distinction between the two. However, accounting steps for these two types of leases are just the same. Part 2 During the contemporary period, it can be noted that companies continue to acquire property to improve their operations. Leasing is an alternative means of acquiring long-term assets to be used by business firms (Schroeder, Clark & Cathey, 2005). Leases provide for the right for use of the property by the lessees since they are given the obligation to make a series of payments over a long period of time. As such, leases are similar to long-term debt which enables the lessee to utilise off-balance sheet financing. This paper therefore is mainly concerned with explaining the meaning of debt and equity financing in relation to lease verses purchase options. According to wisegeek, â€Å"debt financing is a way of raising some funds to generate working capital f or the organisation which can be used to fund special projects.† In this regard, the issuer may issue bonds or other debt instruments that can be used as a means of financing the debt associated with the project. Debt financing has a clear start and end