Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

EXERCISE G-3

Purpose: (L.O. 2) This exercise reviews the characteristics and accounting aspects of the two types of leases.

A lease is a contractual arrangement between the lessor (owner of the property) and a lessee (renter of the property) that grants the lessee the right to use specific property for a period of time in return for cash payments. Some lease agreements are in substance installment purchases of assets by the lessees (and, thus, installment sales of the assets by the lessors), although their legal form is that of a lease.

The specific provisions of a lease contract may vary from other similar lease agreements. Generally accepted accounting principles require that each lease be properly classified as either a capital lease or an operating lease.

Instructions

Indicate whether each item below is most likely related to an operating lease or to a capital lease by using the appropriate code letters.

O = Operating Lease

C = Capital Lease

___ 1.	The lease is merely a short-term rental agreement for use of property.
___ 2.	The owner retains ownership of the leased property after the term of the lease and the property has substantial economic value after the lease has expired.
___ 3.	The lease is essentially an installment purchase of property by the lessee.
___ 4.	Rent expense appears on the lessee's financial statements in the periods in which it is incurred.
___ 5.	Interest expense is reported on the books of the lessee.
___ 6.	Rental payments are considered ...