What is an operating lease and what is a capital lease

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Reference no: EM13731811

a. Why do companies lease assets rather than buy them?

b. What is an operating lease? What is a capital lease? What is a direct-financing lease? What is a sales-type lease? (Hint: If your textbook does not cover these lease complexities, use your favorite Internet search engine to find definitions and examples.)

c. Why do accountants distinguish between different types of leases?

d. Consider the following hypothetical lease for a Build-A-Bear Workshop retail location.

• The lease term is five years.

• Lease payments of S 100,000 are due the last day of each year.

• At the end of the lease, title to the location does not transfer to Build-A-Bear nor is there a bargain purchase option.

• The expected useful life of the location is 25 years. The fair value of the location is estimated to be 51,500,000.

i. Will this lease be treated as an operating lease or a capital lease under current U.S. GAAP? Explain.

ii. Provide the journal entry that Build-A-Bear Workshop will record when it makes the first lease payment.

iii. Assume that a second lease is identical to this lease except that Build-A-Bear Workshop is offered a "first year rent-free." That is, the company will make no cash payment at the end of year one, but will make payments of $125,000 at the end of each of years 2 through 5. Provide the journal entries that the company will make over the term of this lease.

Reference no: EM13731811

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