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● Case 13-4 Application of SFAC No. 13

On January 1, 2006, Lani Company entered into a non cancelable 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.

b. How should Lani account for this lease at its inception and determine
the amount to be recorded?

c. What expenses related to this lease will Lani incur during the first year
of the lease, and how will they be determined?

d. How should Lani report the lease transaction on its December 31,
2006, balance sheet?


● Case 13-5 Lease Classifications

Doherty Company leased equipment from Lambert Company. The classification
of the lease makes a difference in the amounts reflected on the balance
sheet and income statement of both Doherty and Lambert.

a. What criteria must be met by the lease in order that Doherty Company
classify it as a capital lease?

b. What criteria must be met by the lease meet in order that Lambert
Company classify it as a sales-type or direct financing lease?

c. Contrast a sales-type lease with a direct f

  • accounting -

    How should Lani account for this lease at its inception and determine
    the amount to be recorded?

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