Determination of Asset Life
Jen Latke is an accountant for Hale’s Manufacturing Company. Hale’s has entered into an agreement
to lease a piece of equipment from EZ Leasing. Jen must decide how to report the lease
agreement on Hale’s financial statements.
Jen has reviewed the lease contract carefully. She also has reviewed the four lease criteria
specified in the accounting rules. She has been able to determine that the lease does not meet
three of the criteria. However, she is concerned about the criterion that indicates that if the term
of the lease is 75% or more of the life of the property, the lease should be classified as a capital
lease. Jen is fully aware that Hale’s does not want to record the lease agreement as a capital
lease, but prefers to show it as a type of off-balance-sheet financing.
Jen’s reading of the lease contract indicates that the asset has been leased for seven years. She
is unsure of the life of such assets, however, and has consulted two sources to determine it. One
of them states that equipment similar to that owned by Hale’s is depreciated over nine years. The
other, a trade publication of the equipment industry, indicates that equipment of this type will
usually last for 12 years.