Chapter 15 - Leases. In the previous chapter, we saw how companies account for their long-term debt. The focus of that discussion was bonds and notes. In this chapter we continue our discussion of debt, but we now turn our attention to liabilities arising in connection with leases. | Leases 15 Chapter 15: Leases Learning Objectives Identify and describe the operational, financial, and tax objectives that motivate leasing. LO1 Our first learning objective in Chapter 15 is to identify and describe the operational, financial, and tax objectives that motivate leasing. Basic Lease Terms A lease is an agreement where the lessor conveys the right to use property, plant, or equipment, usually for a stated period of time, to the lessee. Lessor = Owner of property Lessee = Renter The lessee receives the beneficial use of property in the lease. The lessor owns the property, and the lessee is the party who uses the assets and makes lease payments. Lease Classifications From the perspective of the lessee, we have two types of leases. The first lease is referred to as an operating lease, and the second is known as a capital lease. We view a capital lease as an in-substance purchase of an asset. From the perspective of the lessor, we have three types of leases. We have an operating lease, a direct-financing-type lease, and a sales-type lease. Learning Objectives Explain why some leases constitute rental agreements and some represent purchase/sales accompanied by debt financing. LO2 Our second learning objective in Chapter 15 is to explain why some leases constitute rental agreements and some represent a purchase or sale accompanied by debt financing. Capital Leases and Installment Notes Compared Matrix, Inc. acquires equipment from Apex, Inc. by paying $193,878 (rounded) every six months for the next three years. The interest rate associated with the agreement is 9%. Let’s look at the arrangement as an installment note payable and as a capital lease agreement. First, let’s prepare an amortization schedule for the payments. Part I From the perspective of the lessee there is a direct comparison between a capital lease and an installment note. In this example, Matrix purchases equipment from Apex, agreeing to pay $193,878 (rounded), every six months for the next | Leases 15 Chapter 15: Leases Learning Objectives Identify and describe the operational, financial, and tax objectives that motivate leasing. LO1 Our first learning objective in Chapter 15 is to identify and describe the operational, financial, and tax objectives that motivate leasing. Basic Lease Terms A lease is an agreement where the lessor conveys the right to use property, plant, or equipment, usually for a stated period of time, to the lessee. Lessor = Owner of property Lessee = Renter The lessee receives the beneficial use of property in the lease. The lessor owns the property, and the lessee is the party who uses the assets and makes lease payments. Lease Classifications From the perspective of the lessee, we have two types of leases. The first lease is referred to as an operating lease, and the second is known as a capital lease. We view a capital lease as an in-substance purchase of an asset. From the perspective of the lessor, we have three types of leases. We have an .
