ACC/400 Case Study 13 5

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Week 5 Assignments from the Reading

University of Phoenix

ACC 400 - Accounting for Decision Making


Week 5 Assignments from the Reading

● Case 13-4 Application of SFAC No. 13

On January 1, 2006, Lani Company entered into a noncancelable lease for a

machine to be used in its manufacturing operations. The lease transfers ownership

of the machine to Lani by the end of the lease term. The term of the lease

is eight years. The minimum lease payment made by Lani on January 1, 2006,

was one of eight equal annual payments. At the inception of the lease, the criteria

established for classification as a capital lease by the lessee were met.


a. What is the theoretical basis for the accounting standard that requires

certain long-term leases to be capitalized by the lessee? Do not discuss

the specific criteria for classifying a specific lease as a capital lease.

When a lease transfers substantially all of the risks and benefits incident to the ownership of property to the lessee, it should be capitalized by the lessee. The economic effect of such a lease on the lessee is similar, in many respects, to that of an installment purchase.

b. How should Lani account for this lease at its inception and determine

the amount to be recorded?

Lani should account for this lease at its inception as an asset and an obligation at an amount equal to the present value at the beginning of the...