Week Three Team Assignment Essay Example | Topics and Well Written Essays - 1000 words

Week tierce Team Assignment - Essay ExampleI think that the four criterion rule is short necessary because not all undertakes should qualify as capital permits. A capital lease is enured much differently than an operational lease in the accounting books of the company. A capital lease creates two an asset and a liability in the balance sheet of the company. When SFAS No. 13 qualifies a lease as a capital lease full disclosure of what is actually happing in the company is give away in the balance sheet of the firm.The first criterion is that transfer of ownership essential occur in the contract lease. This is absolutely necessary because without transfer of ownership a company cannot truly claim that the dimension is theirs. Failing to comply with this criteria completely justifies classifying a lease as operating instead of capital. In tenderness this criterion is making sure that companies to dot enter into a bunch of leases to inflate the value of their assets. An operat ing lease is basically entering into an arrangement to borrow a seat for a specific stage of time. The second criterion in SFAS No. 13 is that a lease must contain a bargain purchase option to qualify as a capital lease. The rationale for this stipulation is if during the stipulation of the lease the lessee can purchase the asset at a price substantially below its graceful market value, the lessee will exercise that option, thus the lease should be reported as a undertake asset on the lessees books (Weygandt, et. al, 2002, pg. 657). It makes a lot of sense that a purchase option must exist in a capital lease because this clause creates the final buying transaction required to acquire an asset.The third criterion states that the lease term equals 75% or more of the economic emotional state of the leased asset. I also agree a lot with this stipulation. In a capital lease the business must have the asset for the majority of the useful life. If a company holds a property for only a third of the time of its useful life the business has not really