ACC 400 Week 5 E-text Individual Assignments

Week 5: E-text Individual Assignments 
Financial Accounting Theory and Analysis: Text Readings and Cases 8th edition
Chapter 13: Case 13-4 Application of SFAC No. 13

  1. a.      What is the theoretical basis for the accounting standard that requires certain long-term leases to be capitalized by the lessee? Do not discuss the specific criteria for classifying a specific lease as a capital lease.

The theoretical basis of the accounting standard that requires certain long-term leases to be capitalized by the lessee is based on the risks and the benefits associated with the assets, which are borne by the lessee.
“The conceptual foundation underlying SFAS No. 13 is based on the view that ‘a lease that transfers substantially all of the benefits and risks inherent in the ownership of property should be accounted for as the acquisition of an asset and the incurrence of an obligation by the lessee and as a sale or financing lease by the lessor’” (Schroeder, Clark, & Cathey, 2005, p. 418).

  1. b.      How should Lani account for this lease at its inception and determine the amount to be recorded?

Lani Company should account for this lease as a capital lease at its inception. In addition,
Lani Company should record the amount equal to present value of the minimum lease payment. The rate is the lessee’s incremental borrowing rate or the lessor’s implicit rate. “Once the minimum lease payments or fair market value is determined, the next step is to compute the present value of the lease payments. The interest rate to be used in this computation is generally the lessee’s incremental borrowing rate” (Schroeder, Clark, & Cathey, 2005, p. 423).
“If the lessee can readily determine the implicit interest rate used by the lessor and if that rate is lower than his or her incremental borrowing rate, then the lessee is to use the lessor’s implicit interest rate for calculating the present value of the minimum lease payments” (Schroeder, Clark, & Cathey, 2005, p. 423).
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