# Accounting for Operating & Capital Leases Flashcards

Accounting for Operating & Capital Leases Flashcards
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You took out a capital lease for equipment that cost \$15,000. Your annual payment is \$3,000. Your expected rate of return is 10%. How much will your Cash account be credited on the first year?

The Cash account is credited for both interest and principle payments, so \$3,000.

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Capital Leases: Recording Payments

Debit the principle from Lease Payable

Debit interest from Interest Expense

Credit total of principle and interest to Cash

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You took out a capital lease for equipment that cost \$15,000. Your annual payment is \$3,000. Your expected rate of return is 10%. What is your principle and interest payment for the first year?

15,000 x 10% = 1,500 for interest. 3,000 - 1,500 = 1,500 for the principle.

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Calculating Principle Expense on a Capital Lease: Formula

Annual Payment - Interest Expense Component = Principle Expense

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Calculating Interest Expense on a Capital Lease: Formula

Book Value of the Lease x Rate of Return Expected = Interest Expense Component

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Capital Leases: Ownership Rights

Your business will retain ownership of the leased item after the lease ends with this kind of lease, setting it apart from an operating lease, where these rights go back to the lessor.

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Capital Leases: Execution

This occurs when a business records the ownership of the asset it is leasing. It involves debiting the Property and Equipment account while crediting the Leasing Obligation Liability account.

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Capital Leases: Depreciation

These leases require businesses to account for and record the wear and tear on the item they are leasing. This sets them apart from operating leases, which do not require this calculation.

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Capital Lease

Businesses with this type of lease get ownership rights over the item they are leasing. They must record the lease on their balance sheet at its fair value on the market.

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## Flashcard Content Overview

You can use these flashcards as study aids to go over the differences between a capital lease and an operating lease. You'll also be able to focus on prepaid operating leases. This set reviews the steps to calculate interest and principle payments on capital leases. It also details the accounts impacted by lease payments.

Front
Back
Capital Lease

Businesses with this type of lease get ownership rights over the item they are leasing. They must record the lease on their balance sheet at its fair value on the market.

Capital Leases: Depreciation

These leases require businesses to account for and record the wear and tear on the item they are leasing. This sets them apart from operating leases, which do not require this calculation.

Capital Leases: Execution

This occurs when a business records the ownership of the asset it is leasing. It involves debiting the Property and Equipment account while crediting the Leasing Obligation Liability account.

Capital Leases: Ownership Rights

Your business will retain ownership of the leased item after the lease ends with this kind of lease, setting it apart from an operating lease, where these rights go back to the lessor.

Calculating Interest Expense on a Capital Lease: Formula

Book Value of the Lease x Rate of Return Expected = Interest Expense Component

Calculating Principle Expense on a Capital Lease: Formula

Annual Payment - Interest Expense Component = Principle Expense

You took out a capital lease for equipment that cost \$15,000. Your annual payment is \$3,000. Your expected rate of return is 10%. What is your principle and interest payment for the first year?

15,000 x 10% = 1,500 for interest. 3,000 - 1,500 = 1,500 for the principle.

Capital Leases: Recording Payments

Debit the principle from Lease Payable

Debit interest from Interest Expense

Credit total of principle and interest to Cash

You took out a capital lease for equipment that cost \$15,000. Your annual payment is \$3,000. Your expected rate of return is 10%. How much will your Cash account be credited on the first year?

The Cash account is credited for both interest and principle payments, so \$3,000.

Prepaid Operating Leases: Recording Yearly Payments

Debit full payment amount from the Prepaid Lease account

Credit full payment amount to the Cash account

You have an operating lease for a printer. You have to pay \$500 for it every year for 3 years in advance. How will you record this in your journal?

You will debit \$500 from the Prepaid Lease account and credit \$500 to the Cash account.

Prepaid Operating Leases: Recording Monthly Payments

Divide the total yearly prepayment by 12 to get a monthly payment. Debit this payment from the Rent Expense account and credit the Prepaid Lease account every month.

You're paying monthly on a prepaid operating lease for a printer. The yearly prepayment is \$2,400. How do you record the payments every month if you adjust for time's passage?

2,400 / 12 = 200. Debit 200 from the Rent Expense account and credit 200 to the Prepaid Lease account.

Prepaid Operating Leases

These operating leases must be paid for at the beginning of every year. They will affect your company's cash flow statement and balance sheet.

Prepaid Operating Leases: Adjustment Over Time

These changes are made over the course of a year to account for accrued expenses. They affect the balance sheet and income statement, but not the cash flow statement.

Operating Lease

This type of lease offers a bargain purchase price though the lessor retains ownership when the lease ends. The lessee can not use the asset for over 75% of what we consider its useful life.

Operating Lease: Recording Payments

Debit payment from Rental Expense account

Credit payment to Cash account

Operating Lease: Benefits

These leases allow businesses to use equipment that they might not be able to pay for outright. They also give businesses access to tools that they might only need for a short period of time.

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