Case 13-6 Sales Type versus Direct Financing Leases

Part 1: Capital leases and operating leases are the two classifications of leases described in FASB pronouncements from the standpoint of the lessee.

Required:

a.Describe how a capital lease would be accounted for by the lessee both at the inception of the lease and during the first year of the lease, assuming the lease transfers ownership of the property to the lessee by the end of the lease.

b.Describe how an operating lease would be accounted for by the lessee both at the inception of the lease and during the first year of the lease, assuming the lessee makes equal monthly payments at the beginning of each month of the lease. Describe the change in accounting, if any, when rental payments are not made on a straight-line basis. Do not discuss the criteria for distinguishing between capital leases and operating leases.