In this video, we cover a finance lease CPA exam simulation.
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A finance lease, also known as a capital lease, is a type of lease arrangement that is primarily used in business and commercial finance. In this arrangement, the lessee (the party that uses the asset) selects an asset (equipment, vehicle, machinery, etc.) and the lessor (the owner of the asset) purchases that asset for the lessee to use over a specified period.

Here are the key characteristics and implications of a finance lease:

Asset Ownership: Although the lessee has control over the asset and records it on their balance sheet as if they own it, the legal title may not transfer until the end of the lease term, depending on the specific terms of the lease agreement.

Lease Term: The lease term of a finance lease is usually long, often covering a significant portion of the asset's useful life.

Payments: Lease payments are structured to cover the original cost of the asset plus interest, meaning that over the term of the lease, the lessee will pay an amount roughly equivalent to the full value of the asset.

Risks and Rewards: The lessee assumes most of the risks and rewards of ownership, such as the risk of obsolescence and the benefit of any residual value of the asset.

Bargain Purchase Option: Many finance leases include a bargain purchase option that allows the lessee to purchase the asset at a price significantly lower than its fair market value at the end of the lease term.

Accounting Treatment: For accounting purposes, finance leases are capitalized, meaning the lessee records the leased asset as an asset on their balance sheet and the lease payments as liabilities. This treatment reflects the economic reality that the lessee has acquired the use of a long-term asset and has taken on a corresponding obligation to pay.

Tax Implications: The tax treatment of finance leases can vary by jurisdiction, but generally, the lessee can claim depreciation expense on the asset and interest expense on the lease payments.

Finance leases are a common way for businesses to acquire the use of assets without the need for significant upfront capital expenditure. They are particularly useful for assets that are expensive and have a long useful life.


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