CHAPTER 6

Leases

Overview

Leases are contractual arrangements where the legal owner of property called the “lessor” (e.g., landlord), allows another party called the “lessee” (e.g., tenant) to use the property in exchange for consideration (usually cash). Leasing is a very controversial accounting area. There are basically two accounting treatments applied to leases. The “operating lease” method treats the arrangement as a rental, whereas the “capital lease” method treats it as a transfer of the property with simultaneous financing. Operating leases result in recognition of rent expense or revenue over the lease term under the accrual basis. Capital lease treatment for the lessee involves recording the leased asset and an equal amount of a ...

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