Question

Define/describe the following lease terms:

1. Lease

2. The two parties involved in the lease.

3. Operating vs Financing Lease

4. Interest Only vs. Sales-Type Lease

5. Guaranteed Residual Value and its impact on the NPV of Minimum Lease Payment calculation

6. Accounting for Executory Costs if the Lessee pays for these

7. Triple Net Lease

8. Discuss how depreciation calculation is different between a lease with a title transfer or bargain purchase option vs a lease that does not contain a title transfer or a bargain purchase option

Answer 1

1. Lease : It is an agreement between two underlying parties, on a contract of renting of land , building or any floor space to another for a specific period of time or at the will of either of the parties in the contract for some specific consideration. It is the grant of temporary possession of land or any building to another for rent at fixed rate of return.
2. The two parties involved in lease : the parties involved in lease agreement are lessor and lessee. Lessor is the person who gives his property on lease(giving the temporary possession of his property to another) for some consideration at a fixed rate of return for specified time period, whereas, lessee is the person who acquires the possession of the property from lessor temporarily or as per lease agreement by paying certain amount of consideration to the lessor.
3. Operating Vs Financing Lease : Operating lease is a lease , which does not transfer all the risks and rewards incidental to ownership of the leased property,mostly the operating lease will be for one or less than one year. Finance lease is a lease that transfers substantially all the risks an rewards incidental to ownership of an asset to the lessee by the lessor but not the legal ownership, the lesse if agreement provided will get the ownership of leased asset at the end of lease term, the lessee has an option to buy the leased asset at the end of lease term for a price lower than the fair value of the asset, the lease term covers the major portion of the life of the asset even if title is not transferred.

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