Complete 4 page APA formatted essay: Week Three Team Assignment.I think that the four criterion rule is absolutely necessary because not all leases should qualify as capital leases. A capital lease is

Complete 4 page APA formatted essay: Week Three Team Assignment.

I think that the four criterion rule is absolutely necessary because not all leases should qualify as capital leases. A capital lease is treated much differently than an operating lease in the accounting books of the company. A capital lease creates both 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 disclosed in the balance sheet of the firm.

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Complete 4 page APA formatted essay: Week Three Team Assignment.I think that the four criterion rule is absolutely necessary because not all leases should qualify as capital leases. A capital lease is
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The first criterion is that transfer of ownership must occur in the contract lease. This is absolutely necessary because without transfer of ownership a company cannot truly claim that the property is theirs. Failing to comply with this criteria completely justifies classifying a lease as operating instead of capital. In essence this criterion is making sure that companies to dot enter into a bunch of leases to inflate the value of their assets. An operating lease is basically entering into an arrangement to borrow a property for a specific period 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 term of the lease the lessee can purchase the asset at a price substantially below its fair market value, the lessee will exercise that option, thus the lease should be reported as a leased asset on the lessee’s 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 needed to acquire an asset.

The third criterion states that the lease term equals 75% or more of the economic life 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

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