one in which the lessee obtains significant property rights. Although not legally a purchase, theoretical substance governs over legal form and requires that the leased property be recorded as an asset on the lessee's books. The asset equals the present value of minimum lease payments. A capital lease exists if any one of the following four criteria is met: (1) the lease transfers ownership of the property to the lessee at the end of the lease term; (2) a bargain purchase option exists; (3) lease term is 75% or more of the life of the property; (4) the present value of minimum lease payments equals or exceeds 90% of the fair value of the property.

accounting by lessor in which one or more of the four criteria required for a capital lease are met and both of the following criteria are satisfied: (1) collectibility of minimum lease payments is predictable and (2) no important uncertainties surround the amount of unreimbursable costs yet to be incurred. A sales type lease gives rise to a manufacturer's or dealer's profit or loss on the assumed sale of the item in the year of lease as well as interest income over the life of the lease. Lease payments receivable is recorded representing the minimum lease payments (net of amounts, if any, including executory costs with any profit thereon) plus the unguaranteed residual value accruing to the benefit of the lessor. The difference between lease payments receivable and the discounted value of the payments is recorded as unearned interest income. The discount rate used to determine the present value of lease payments is the lessor's implicit rate. Assume a sales type lease is entered into on 1/1/2004. Six year-end annual lease payments of $20,000 are to be received. The discount rate is 5%. The present value of an ordinary annuity for n = 6, i = 5% is 5.0757. The cost of the leased item is $85,000. Initial direct costs of the lease are $4000. Appropriate journal entries for 2004 and 2005 follow:

rental of property between the lessee and lessor for a fee. An operating lease does not meet the criteria for a capital lease. An example is renting of an apartment or automobile. The lessee debits rental expense and credits cash. Rental expense should be recognized on a straight-line basis, unless another systematic and rational basis is more representative of the time pattern in which benefit use is derived. Thelessee shows nothing about the lease on the balance sheet. Lessee footnote disclosure includes future minimum lease payments in aggregate and for each of the five succeeding fiscal years, contingent rentals, and sublease rentals. The lessor, upon receipt of rental payments, debits cash and credits rental revenue. The lessor also records depreciation expense on the leased item and any expenses related to the leased property, such as maintenance expense. Normal accrual basis accounting techniques are followed for the recognition of income and expense. The lessor reports on his balance sheet the leased asset less accumulated depreciation. Footnote disclosure by the lessor includes the cost of property on lease or held for leasing by major class, minimum future rentals in the aggregate and for each of the five succeeding years, and contingent rentals.

method used by lessors in capital leases when both of the following criteria for the lessor are satisfied: (1) collectibility of minimum lease payments is assured and (2) no important uncertainties surround the amount of unreimbursable costs yet to be incurred. In a direct financing lease, the lessor is not a manufacturer or dealer in the item; the lessor purchases the property only for the purpose of leasing it. The lessor uses the interest rate implicit in the lease to discount the future payments from the lessee. The difference between the gross investment in the lease and the cost of the leased property is reported as unearned interest income. Unearned interest income is then amortized using the interest method thus resulting in interest income over the life of the lease. Initial direct costs of the lease are expensed. sales type lease.

sale of property by the owner to a purchaser who then leases it to the former owner. The net effect of this transaction is similar to a loan to the former owner with the property serving as collateral. Any profit or loss on the sale is deferred and amortized in proportion to the amortization expense on the leased asset if a capital lease, or in proportion to the rental payments if this is an operating lease. However, when the fair value of the property at the time of the transaction is less than its book value, a loss will be recognized immediately, up to the amount of the difference between undepreciated cost and fair value.

rental of property between the lessee and lessor for a fee. An operating lease does not meet the criteria for a capital lease. An example is renting of an apartment or automobile. The lessee debits rental expense and credits cash. Rental expense should be recognized on a straight-line basis, unless another systematic and rational basis is more representative of the time pattern in which benefit use is derived. Thelessee shows nothing about the lease on the balance sheet. Lessee footnote disclosure includes future minimum lease payments in aggregate and for each of the five succeeding fiscal years, contingent rentals, and sublease rentals. The lessor, upon receipt of rental payments, debits cash and credits rental revenue. The lessor also records depreciation expense on the leased item and any expenses related to the leased property, such as maintenance expense. Normal accrual basis accounting techniques are followed for the recognition of income and expense. The lessor reports on his balance sheet the leased asset less accumulated depreciation. Footnote disclosure by the lessor includes the cost of property on lease or held for leasing by major class, minimum future rentals in the aggregate and for each of the five succeeding years, and contingent rentals.

one in which the lessee obtains significant property rights. Although not legally a purchase, theoretical substance governs over legal form and requires that the leased property be recorded as an asset on the lessee's books. The asset equals the present value of minimum lease payments. A capital lease exists if any one of the following four criteria is met: (1) the lease transfers ownership of the property to the lessee at the end of the lease term; (2) a bargain purchase option exists; (3) lease term is 75% or more of the life of the property; (4) the present value of minimum lease payments equals or exceeds 90% of the fair value of the property.

anticipated value or fair market value of an asset at the expiration of a lease. Fair market value is determined by agreement, or by appraisal. In an open-end lease, a consumer lease often used in auto financing, the lessee has the option of buying the car at its assumed residual value. Under Federal Reserve Regulation Y, bank holding companies are permitted to assume residual values not greater than 25% of an asset's acquisition cost.

contract for a lease of personal property, such as an automobile, boat, or household appliance with a total obligation under $25,000. Lease financing has a fixed schedule of monthly payments, usually over a three- to five-year period, and may include an option to purchase the leased property at maturity. Bank lessors are required by Federal Reserve Regulation M to disclose the actual cost to the consumer. This includes security deposits, monthly payments, taxes, and registration costs, and in an open-end lease, whether a balloon payment is due at maturity.

rental of property between the lessee and lessor for a fee. An operating lease does not meet the criteria for a capital lease. An example is renting of an apartment or automobile. The lessee debits rental expense and credits cash. Rental expense should be recognized on a straight-line basis, unless another systematic and rational basis is more representative of the time pattern in which benefit use is derived. Thelessee shows nothing about the lease on the balance sheet. Lessee footnote disclosure includes future minimum lease payments in aggregate and for each of the five succeeding fiscal years, contingent rentals, and sublease rentals. The lessor, upon receipt of rental payments, debits cash and credits rental revenue. The lessor also records depreciation expense on the leased item and any expenses related to the leased property, such as maintenance expense. Normal accrual basis accounting techniques are followed for the recognition of income and expense. The lessor reports on his balance sheet the leased asset less accumulated depreciation. Footnote disclosure by the lessor includes the cost of property on lease or held for leasing by major class, minimum future rentals in the aggregate and for each of the five succeeding years, and contingent rentals.

sale of property by the owner to a purchaser who then leases it to the former owner. The net effect of this transaction is similar to a loan to the former owner with the property serving as collateral. Any profit or loss on the sale is deferred and amortized in proportion to the amortization expense on the leased asset if a capital lease, or in proportion to the rental payments if this is an operating lease. However, when the fair value of the property at the time of the transaction is less than its book value, a loss will be recognized immediately, up to the amount of the difference between undepreciated cost and fair value.

base dollar cost of a leased asset, excluding finance charges, that is amortized over the life of the lease. The figure may include taxes, insurance, service agreements, and outstanding balances from previous leases. Disclosure of capitalized cost is required in consumer leases. Also called capitalization cost.

difference between the rent received by a lessee for the subletting property and the rent the lessee pays the lessor.

difference between the rent paid by a lessee as fixed by a lease prior to destruction of property and the rent received by the lessor after that property has been restored.

coverage for a tenant with a favorable lease (enabling the lessee to rent premises for less than the market value). If the lease is canceled by the lessor because an insured peril (such as fire) strikes, the lessee is indemnified for the loss incurred. The premise is that the lessee will have to forgo earnings derived from having an advantageous lease, and should be indemnified for this incurred loss.

one in which the lessee obtains significant property rights. Although not legally a purchase, theoretical substance governs over legal form and requires that the leased property be recorded as an asset on the lessee's books. The asset equals the present value of minimum lease payments. A capital lease exists if any one of the following four criteria is met: (1) the lease transfers ownership of the property to the lessee at the end of the lease term; (2) a bargain purchase option exists; (3) lease term is 75% or more of the life of the property; (4) the present value of minimum lease payments equals or exceeds 90% of the fair value of the property.

rental of property between the lessee and lessor for a fee. An operating lease does not meet the criteria for a capital lease. An example is renting of an apartment or automobile. The lessee debits rental expense and credits cash. Rental expense should be recognized on a straight-line basis, unless another systematic and rational basis is more representative of the time pattern in which benefit use is derived. Thelessee shows nothing about the lease on the balance sheet. Lessee footnote disclosure includes future minimum lease payments in aggregate and for each of the five succeeding fiscal years, contingent rentals, and sublease rentals. The lessor, upon receipt of rental payments, debits cash and credits rental revenue. The lessor also records depreciation expense on the leased item and any expenses related to the leased property, such as maintenance expense. Normal accrual basis accounting techniques are followed for the recognition of income and expense. The lessor reports on his balance sheet the leased asset less accumulated depreciation. Footnote disclosure by the lessor includes the cost of property on lease or held for leasing by major class, minimum future rentals in the aggregate and for each of the five succeeding years, and contingent rentals.

sale of property by the owner to a purchaser who then leases it to the former owner. The net effect of this transaction is similar to a loan to the former owner with the property serving as collateral. Any profit or loss on the sale is deferred and amortized in proportion to the amortization expense on the leased asset if a capital lease, or in proportion to the rental payments if this is an operating lease. However, when the fair value of the property at the time of the transaction is less than its book value, a loss will be recognized immediately, up to the amount of the difference between undepreciated cost and fair value.