Lease Vs Operating Lease

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This case study provides an overview of accounting for leases, specifically capital and operating leases. Some researchers have found that managers manipulate leasing data in order to report a large amount of debt on the off balance sheet, rather than on the financial statement (Biondi et al, 2011). When an entity leases property, they must pay installments on the property for the terms of the lease contract (Schroeder et al, 2011). While there are some benefits in leasing property, there are also some complications that may occur. This paper will explore the accounting for leases and identify differences between the types of leases a firm may pursue.

Leasing: Capital or Operational Several studies have been conducted
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• Payment of a bargain purchase option.
• Any guarantee by the leaseholder of residual value at the end of the lease.
• Any penalties that the leaseholder is liable to pay for not renewing the contract.
Operating Lease Operating leases on the other hand, are simpler than capital leases, because the rentals are considered revenue to for the landlord and expenses for the tenants. All rental advance payments will be recorded as a liability to the lessor and prepaid rent for the lessee (Schroder et al, 2011). For operating leases, APB Opinion No. 13 focus on noncapital leases which must reported by the leaseholder in a disclosure on the financial statement with the following requirements (Schroeder et al, 2011):
• Three conditions required to be reported on operating leases by the leaseholder:
a. Minimum rental payments required at the date of the latest balance sheet up to five years in the future.
b. The total minimum rental to be received in the future under subleases as of the date of the latest balance sheet.
• Rental expenses for each period, which an income statement is presented, with separate amounts for minimum rentals, contingent rentals and sublease

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