Chapter 21, Problem 4CA

To determine

Lease: A contractual arrangement between the owner of the asset and the user of the asset for a fixed amount of money is termed lease. In this contract the owner of the asset permits the user to use the property for a fixed sum of money received at the time of handing over the asset. At the end of the contract tenure the user of the asset need to return the asset to the owner. The parties involved in the contract are termed the lessor the owner of the asset and the lessee the user of the asset.

Capital lease method: A process of using the asset for a rental payable in installments along with interest and gets the ownership of the title at the end of the lease contract is termed capital lease. In this, the owner of the asset or the lessor need not bear expenses like depreciation, insurance, maintenance and repair. All these expenses need to be paid by the lessee. In a nutshell, capital lease is like an installment sale.

Operational lease method: A process of using the asset for a rental payable in installments or in bulk without transfer of ownership of the asset is termed operation lease. The lessee has to return back the asset once the tenure of lease is over. The expenses like insurance, maintenance and repair expenses are borne by the lessor.

Direct finance leasing: An agreement created between the non manufacturer and a lessee who use the asset merely for the interest receivable is termed the direct finance lease. In this arrangement the lessor provides finance to the lessee and leases the asset to the lessee. The income receivable by the lessor is the interest payable for the leased asset value.

Sale type leasing: An agreement created between the lessor and lessee for an amount higher than the cost of the asset leased is termed sale type lease. In this type of lease the amount payable for lease includes the profit which the lessor wishes to include. The agreement should end with the transfer of ownership and the lease tenure should be at least 75% of the life of the leased asset.

Part 1 (a)

To determine the way in which lease inception, first year lease payment and transfer of ownership after lease is recorded by the lessee in capital lease.

To determine

Part 1 (b)

To determine the way in which lease inception and first year lease payment is recorded in case the lease payment is same and if the lease payment is different on all installments in operational lease.

To determine

Part 2 (a)

To determine the lease receivable in direct finance lease and sale type lease.

To determine

Part 2 (b)

To determine the way through which the interest revenues are recognized in direct finance lease and sale type lease.

To determine

Part 2 (c)

To determine the details regarding the manufacturer or dealer profit in sale type and direct finance lease.