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(Solved) Corporate Accounting- Assignment

   

Added on  2021-06-17

5 Pages1261 Words46 Views
CorporateAccounting1

Lease is the contractual arrangement under which one party gives to the other an asset for usein exchange for consideration. Leases can be classified into two types – financial lease andoperating lease. In a contract for lease there are two parties involved, the lessor and thelessee. The party which lends the assets is the lessor and the party which pays for use of theasset is the lessee[ CITATION Fri12 \l 1033 ]. In order to treat the lease in the books of accountswe need to first classify the type of lease. If the lease agreement transfers substantially thewhole of the risks and rewards of the asset to the lessee then it will be classified as a financiallease. Also, if the present value of rent is substantially equal to the fair value of the asset or atthe end of the lease period the ownership would be transferred to the lessee, then under suchcircumstances the lease would be classified as a financial lease. In all other cases the leasesare classified as operating leases. [ CITATION Gir14 \l 1033 ]In case of finance lease the manufacturer or the lessor is required to recognise the asset givenon lease in the books of accounts[ CITATION Itt09 \l 1033 ]. He is required to record thefollowing in respect to all the leases:-Revenue is to be recorded at the fair value of the asset as on the date of lease or thepresent value of the lease rentals discounted at the market rate of interest, whichever islower.[ CITATION Men14 \l 1033 ]-The cost of the sale which is to be recorded at the cost of the asset on lease, or if thecarrying amount is not the same, then it is to be recorded at the cost less present value ofthe unguaranteed residual value of the asset o lease.-The difference between the revenue and the cost of lease is classified as the profit or losson lease. This to be recorded in the books immediately as the sale takes place.[ CITATIONPip15 \l 1033 ]In the case of finance lease the lessee is provided with an option of either taking the asset onlease or buying it from the lessor or manufacturer. The amount of profit or loss arising fromsale of asset on lease is equivalent to the profit or loss on sale of asset in the ordinary case.There will not be any extra losses or profit if the lessor sells the asset in financial lease.[ CITATION Rau62 \l 1033 ]The manufacturers or dealer lessor quote lower rates of interest in case of lease so that theycan attract more customers. Under such circumstances, use of lower rates leads the lessor torecognise higher profits in the books on the date of sale. If the lessor has been using low rates2

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