Case 13-4 and 13-5 Essay Example | Topics and Well Written Essays - 1000 words

Case 13-4 and 13-5 - Essay Example One such criterion is â€Å"the lease transfers ownership of the property to the lessee by the end of the lease term† with the phrase â€Å"lease term† defined by paragraph 5(f) of SFAS No. 13 as a â€Å"fixed noncancelable term of the lease†. Since the lease is not cancelable and will transfer ownership of the machine after the lease term to Lani, this lease qualifies as a capital lease. For capital leases, Lani, who is the lessee, is required to book both an asset and a liability in her books. According to Paragraph 10 of SFAS No. 13, the amount recorded should be the higher of the fair value of the leased property and the â€Å"present value at the beginning of the lease term of minimum lease payments during the year†. The minimum lease payments (and therefore the present value) should exclude the costs to execute the lease contract. The expenses that Lani may incur during the first year of the lease are the â€Å"executory costs† that Lani may reimburse to her lessor. These costs may include insurance costs, maintenance costs and transfer taxes that will be initially paid by the lessors but will later be reimbursed by the lessee. Such costs are clearly laid down in the lease contract and should be properly excluded from the minimum lease payments used to calculate the present value. According to Paragraph 13 of SFAS No. 13, the capitalized asset should not be offset against the liability recognized for the capital lease. The asset capitalized should be shown separately in the balance sheet of the lessee or in the notes to financial statements, net of the related accumulated amortization. Likewise, the related liability should also be shown separately in the liability section of the balance sheet or in the notes to financial statements. From the point of view of Doherty Company, which is the lessee in this case, the criterion or criteria that should be met prior to classifying the lease as a capital lease may be