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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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