ACCT 304 – Chapter 15 Lease Flashcards

These flashcards cover key concepts, definitions, and criteria related to leases as outlined in Chapter 15 of ACCT 304.

Lease

A contractual arrangement where a lessor (owner) gives a lessee (user) the right to use an asset in exchange for periodic payments.

Lessor

The owner of the asset in a lease agreement.

Lessee

The user of the asset in a lease agreement.

Substance over form

An accounting principle where classification depends on the economic substance of the transaction, not legal ownership.

Finance Lease

A lease classified by the lessee that essentially transfers control of the asset.

Operating Lease

A lease classified by the lessee that does not transfer control of the asset.

Sales-type lease

A lease classification for the lessor that is treated as a sale.

Economic substance

The underlying economic reality of a transaction that determines its classification.

OWNES

A mnemonic used for the five lease classification criteria.

Ownership transfers

The transfer of asset ownership to the lessee at the end of the lease.

Written purchase option

An option within a lease indicating the lessee can buy the asset, which is reasonably certain to be exercised.

Net present value of lease payments

The sum of lease payments that is at least substantially all of the asset’s fair value.

Economic life test

A criterion that assesses if the lease term constitutes a major portion of the asset’s life.

Specialized asset

An asset that has no alternative use to the lessor.

Right-of-Use Asset

An asset recorded by the lessee at the beginning of a lease, reflecting their right to use the leased asset.

Lease Liability

An obligation recorded by the lessee representing the present value of future lease payments.

Interest Expense

The cost incurred related to outstanding lease balance calculated using the lease interest rate.

Amortization expense

The expense recorded by the lessee related to the amortization of the Right-of-Use asset.

Operating lease expense

Recognized by the lessee as a straight-line expense each period.

Implicit rate of the lease

The discount rate used for calculating the present value of lease payments when known.

Lessee’s incremental borrowing rate

The alternative discount rate used for calculating the present value of lease payments when the implicit rate is unknown.