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MAA363 Corporate Lease Accounting Assignment Solution
Lease is a written or implied contract by which an owner of a specific asset such as piece of land, building, equipment or machinery. It offers second party the right to exclusive possession and use for a specific period and under specified conditions, in return for specified periodic rental or lease payments. Leasing is a process by which a firm can obtain the use of a certain fixed asset for which it must make series of contractual periodic tax-deductable payments. There are two types of leases which have been considered in the professional agreements that are as follows:
In a capital lease, the ownership of the property is transferred to the lessee by the end of the lease term. Thus at the end of the lease term, the ownership of the property is transferred. In a capital lease there is an option of purchase and the lease term is equal to 75 percent or more of economic life of leased property.
In an operating lease, the lessee uses the assets as per the time defined in the lease agreement. The lessee can use the asset for the time defined in the lease contract. Either of the party can terminate the lease after giving the notice. For operating a lease, one or more of the capital lease criteria must be fulfilled.
Nature of Current Lease
In the current context, the lease period has been fixed for 20 years with a clause to extend the lease by tomorrow by 10 years; hence the lease period is clearly defined in the system. The lease period is not more than the 75 percent or more of economic life of leased property; as a result the lease would be classified as a operating lease and not a capital lease. The financials for the lease have been clearly defined where the annual payment to Belmore Ltd will be $45,000 and is only 85% of the fair value. Other than this 1% of the total sales will be paid as a contingent rent. The maximum value of contingent rent is of $8,040 each year. Clause for contingent rent also fulfills the criteria for defining the lease as Operating Lease.
Ethics to be followed in Leasing
The most important ethic to be followed during leasing is conducting the business dealings with integrity, honesty and professionalism. In the current lease, it has been fairly stated that lease is for 20 years and can be extended by 10 years. In an unethical lease, there could have been a clause for 30 years and lease could be terminated after 20 years by giving a notice. Also the parties involved should respect the principles of competition and the free marketplace. The funds received during the leasing should be received as fiduciary capacity as fiduciary funds.
In this lease, another important ethical action will be the timely payment of the lease amount and appropriately calculating the contingent rent as 1% of the total sales. Total sales should not be faked so as to save amount on contingent rent. This could lead to termination of lease. Also the financial values have been thoroughly reviewed before finalization considering the market trends to avoid disputes at a later stage.
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