Case Study 1

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Spiceland−Sepe−Nelson: Intermediate Accounting, Sixth Edition

III. Financial Instruments and Liabilities

15. Leases

© The McGraw−Hill Companies, 2011





In the previous chapter, we saw how companies account for their longterm debt. The focus of that discussion was bonds and notes. In this chapter we continue our discussion of debt, but we now turn our attention to liabilities arising in connection with leases. Leases that produce such debtor/creditor relationships are referred to as capital leases by the lessee and as either direct financing or sales-type leases by the lessor. We also will see that some leases do not produce debtor/creditor relationships, but instead are accounted for as rental agreements. These are designated as operating leases.


After studying this chapter, you should be able to:

● LO1 Identify and describe the operational, financial, and tax objectives that motivate leasing. (page 808) ● LO2 Explain why some leases constitute rental agreements and some represent purchases/ sales accompanied by debt financing. (page 809) ● LO3 Explain the basis for each of the criteria and conditions used to classify leases. (page 811) ● LO4 Record all transactions associated with operating leases by both the lessor and lessee. (page 815) ● LO5 Describe and demonstrate how both the lessee and lessor account for a capital lease. (page 817) ● LO6 Describe and demonstrate how the lessor accounts for a sales-type lease. (page 822) ● LO7 Describe the way a bargain purchase option affects lease accounting. (page 824) ● LO8 Explain how lease accounting is affected by the residual value of a leased asset. (page 827) ● LO9 Explain the impact on lease accounting of executory costs, the discount rate, initial direct costs, and contingent rentals. (page 832) ● LO10 Explain sale-leaseback agreements and other special leasing arrangements and their accounting treatment. (page 842) ● LO11...