WORD OF THE WEEK

MEANING

A capital lease is a lease considered to have the economic characteristics of asset ownership. A capital lease would be considered a purchased asset for accounting purposes.

CONDITIONS
A lease must be classified as a capital lease if:

• The life of the lease is 75% or more of the asset’s useful life.
• The lease contains a purchase agreement for less than market value.
• The lessee gains ownership at the end of the lease period.
• The present value of lease payments is greater than 90% of the asset's market value.

ACCOUNTING TREATMENT

Accounting for a capital lease involves four steps.

•        First, record the present value of all future lease payments as the cost of the lease.
•        Then, record only the interest portion of each payment as an expense.
•       Next, depreciate the recognized cost of the asset over the life of the payments.
•     And finally, recognize the disposal of the asset at the end of its useful life.
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