Determination of Asset Life Jen Latke is an accountant for Hale’s Manufacturing Company. Hale’s…

Determination of Asset Life Jen Latke is an accountant for Hale’s Manufacturing Company. Hale’s…

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.

 

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