Characteristics of lease and capital lease

Q. Illustrate the basic characteristics of Lease.

1) A contract of commercial nature between the lessor (owner) and the lessee (user);

2) The contract should provide for periodical payment of rentals for using the asset for a fixed term by the lessee;

3) On the expiry of the lease term the lease should return the asset to the owner or dispose it in the manner desired by the owner.

4) Generally two parties are involved in a lease agreement, they are- a) Lessor; b) Lessee;

Q. Discuss the characteristics of capital lease:

A capital lease would be considered a purchased asset for accounting purposes. A lease considered to have the economic characteristics of asset ownership. A lease falls into capital lease category if any of the following requirements are met:

1. The life of the lease is 75% or greater of the assets useful life.

2. The lease contains a purchase agreement for less than market value.

3. The lessee gains ownership at the end of the lease period.