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Explain the procedures used by the lessee to account for a capital lease.

Explain the procedures used by the lessee to account for a capital lease.

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Answer #1

Procedure used by the lessee to account for a capital lease are as follows -

Firstly, the lesee treats the lease transactions as if the asset were being purchased. The asset and liability are recorded the present value of the minimum lease payments or the fair value of the asset, whichever is lower.

Secondly, using the lessee's incremental borrowing rate, the present value of lease payment is computed.

Thirdly, the effective interest method is used to allocate each lease payment between reduction of the lease liability and interest expense.

Fourthly, if the lease contains a purchase option or transfers ownership, the asset is amortized with the normal depreciation policy. And if the lease does not does not contain a purchase option or transfer ownership, the leased asset is amortized over the lease term.

I have explained well you face any doubt please comment in the box. Thank you !!

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