capital lease

Examples of capital lease in the following topics:

• Overview of Lease Accounting

  • There are two types of leases: capital leases and operating leases and each has a different accounting methodology.
  • There are two types of leases capital leases and operating leases.
  • A capital lease is a form of debt-equity financing in which the lease acts like loan.
  • To that end, a capital lease must be recorded as liability on the company's balance sheet, it is important to note that the IRS treats capital leases as a liability.
  • Under a capital lease, the lessee does not record rent as an expense.

• Operating Expenses, Non-Operating Expenses, and Net Income

  • Its counterpart, a capital expenditure, or non operating expense, is the cost of developing or providing non-consumable parts for the product or system.
  • For example, the purchase of a photocopier is a capital expenditure.

• Analyzing Long-Term Liabilities

  • $\frac { Long-Term\quad Debt\quad +\quad Value\quad of\quad Leases }{ Average\quad Shareholders\quad Equity }$
  • Look how expensive it is to raise capital for such projects based on geographic region.

• Amortization of Intangible Assets

  • If an intangible asset is internally generated in its entirety, none of the costs related to the asset are capitalized.
  • Company X purchases a patent for $17,000, which enables the owner to manufacture, sell, lease, or otherwise benefit from an invention for 17 years.
  • The $10,000 spent to defend the patent is capitalized to the value of the patent on Company X's balance sheet and then amortized over the remaining 12 years of the patent's legal life.

• Being Aware of Off-Balance-Sheet Financing

  • Another example of off-balance-sheet financing is an operating lease, which are typically entered into in order to use equipment on a short-term basis relative to the overall useful life of the asset.
  • An operating lease does not transfer any of the rewards or risks of ownership, and as a result are not reported on the balance sheet of the lessee.
  • For example, if a company defaults on the rental payments required by an operating lease, the lessor could repossess the assets or take legal action, either of which could be detrimental to the success of the company.

• Working Capital Management Analysis

  • Along with fixed assets, such as property, plant, and equipment, working capital is considered a part of operating capital.
  • If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.
  • Decisions relating to working capital and short term financing are referred to as working capital management.
  • Profitability can be evaluated by looking at return on capital (ROC).
  • Identify working capital and discuss how a company would use it

• Cost of Improvements

  • The cost of an asset improvement is capitalized and added to the asset's historical cost on the balance sheet.
  • Asset or capital improvements are undertaken to enhance or improve a business asset that is in use.
  • If the capital improvement is financed, the interest cost associated with the improvement should not be capitalized as an addition to the asset's historical cost.
  • Interest costs are not capitalized for assets that are not under construction.
  • When the cost of a capital improvement is capitalized, the asset's historical cost increases and periodic depreciation expense will increase.

• Accounting Perspectives on Long-Lived Assets

  • All money that is spent to get the asset up and running is capitalized as part as the cost of the asset.
  • The basic rule here is that—when recognizing the asset is allowed—all money that is spent to get the asset up and running is capitalized as part as the cost of the asset.
  • Items that can be capitalized when the firm purchases a machine include the machine itself, transportation, getting the machine in place, fees paid for having the machine installed and tested, the cost of a trial run, and alike.
  • Examples that are excluded from the asset, and consequently are expense rather than capital costs, include the training of personnel to learn how to use the machine, unexpected damages while installing the machine, or the drinks and snacks to celebrate the machine's successful launch.
  • Items spent to get the asset up and running is capitalized as part as the cost of the asset.

• Classifying Liabilities

  • These usually include issued long-term bonds, notes payables, long-term leases, pension obligations, and long-term product warranties.

• Analyzing Intangible Assets

  • Some costs with respect to intangible assets must be capitalized rather than treated as deductible expenses.
  • Treasury regulations generally require capitalization of costs associated with acquiring, creating, or enhancing intangible assets.
  • For example, an amount paid to obtain a trademark must be capitalized.
  • Certain amounts paid to facilitate these transactions are also capitalized.
  • The regulations contain many provisions intended to make it easier to determine when capitalization is required.