A lessee shoul classify

Running Head : CAPITAL LEASE

Criteria for Capital Lease

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Criteria for Capital Lease

A lease is an agreement for the purchase of assets whereby a person or company purchases assets through financing from another party which may be the manufacturer or direct owner of the asset or some financial institution such as a bank . Lease is also a rent agreement whereby a person or company agrees to rent an asset for a certain period of time The party renting or purchasing these assets

is known as a lessee . The lease agreement with respect to a lessee is classified into two categories which are capital lease and operating lease . The rent agreement is usually known as operating lease whereas the purchase agreement is usually known as non-operating lease or capital lease Though the purchase agreements are usually known as capital leases some other conditions have to be met for the lease to be classified as a capital lease . A lease can be classified as a capital lease if it is non-cancelable and meets one of the four following criteria

1 . At the end of a lease agreement the ownership of the leased asset is transferred effectively from the lessor to the lessee

2 . There may be a provision for a purchase of the leased asset by the lessee at a price lower than the market value of the asset at the end of the lease agreement

3 . The time duration of the lease agreement is greater...