1. “Capital Leases and Operating Leases” Please respond to the following:
- Imagine you are the senior accountant at an organization and management is considering leasing some equipment; however, management is unsure of the impact that a capital lease would have on the company. Briefly describe the manner in which a capital lease would be accounted for by the company both at inception of the lease and during the first year of the lease, assuming that lease transfers ownership of the property to the lessee at the end of the lease.
- From the previous bulleted discussion, assume that management now has a clear understanding of capital leases, but has been informed by colleagues that an operating lease may be more beneficial than an operating lease, since the useful life for the equipment is only eight (8) years. Compare and contrast a capital lease and an operating lease, and recommend to management what type of lease would be beneficial since the equipment will become obsolete in eight (8) years. Provide a rationale for your recommendation.