Professional Documents
Culture Documents
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Topic: Income Tax and Leases
Style: MLA
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.
c. Describe Direct Financing and Capital Contracts
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Income Tax Allocation
THREE GENERAL VIEWS REGARDING INTER-PERIOD INCOME TAX ALLOCATION
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The capital lease shall be recognized as an obligation, but valued as the initial leaseterms minimum lease payments current value, but exclude executor expenses like maintenance,
insurance and profit paid by the lessor (Sachse). But in case the established amount exceeds the
initial leased assets fair value, it may imply that obligation and asset value be considered as the
fair value. Approximations in some situations are used, especially if an accurate value of the
executor and profit cannot be established. Assets recorded in the capital lease, and accumulated
amortization shall be identified differently in the leases statement of accounts or the footnotes
thereto.
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From Sachses findings, Rental operating lease is treated as an expense over the entire
lease period as the lease is paid on a monthly basis. Sachses argument is that rent should be
evenly charged through a leased propertys life, especially if it is not charged monthly. Also, rent
need to be fully settled by the end of the latest fiscal year for five succeeding years.
DIRECT FINANCING AND CAPITAL CONTRACTS
Sachse recommends the capital/sales-type leases to be accounted for as follows; the
lessor to settle in full executor expense and an approximate amount of the accumulated fair
value, before they can be entered in the lease agreement as monetary asset. However, the
difference from this investment and the accumulated amount of executor expense and fair value
should be recognized as income-not-earned, which should be then depreciated to obtain constant
percentage of monetary asset. The interest rate is implicit in the lease should be used to find the
discount rate, which would be used to lower the unearned incomes total investment.
According to Sachses analysis, direct financing leases need to be accounted for by the
lessor as follows; the leased payment that is net of the executor costs like taxes, insurance and
maintenance paid by Lessor together with the unguaranteed residual are part of the monetary
asset Differences in the lease and costs monetary asset should be recognized as income-notearned in the balance sheet. Capital expenditure should comprise of the monetary asset minus
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income-not earned. Any revenue not realized should be depreciated to obtain a constant
percentage of the monetary asset so that it can be recognized as an asset when classifying
noncurrent and current assets in the balance sheet. According to Sachses research, the contingent
rentals that include the rental based on the variable like the prime-interest rate shall be credited to
the income.
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Works Cited
Sachse, Willem. Accounting for leases. Munich: GRIN Verlag, 2006.