1) Per SFAS 13, the PV of the minimum lease pmts should be used to determine the

liability under a capital lease. Under an operating lease, a liability arises when
rent expense is recorded but has not been paid. Furthermore, is it recorded at the
actual amount of cash to be paid, not it PV.

2) SFAS 13 states that a lease shall be classified as a capital lease by the lessee if
one or more of the four criteria are met. The four criteria are as follows:
1. Lease transfers ownership to the lessee during lease term
2. Lease contains a bargain purchase option
3. Lease term is 75% or more of the economic useful life of the property
4. Present value of the minimum lease payment equals 90% or more of FMV of
the leased property.

3) Under an operating lease rental revenue is to be recognized in each accounting
period on a straight-line basis unless another systematic and rational basis is more
representative of the decline in the assets service potential.

4) Initial direct costs are costs incurred in connection with the negotiation and
consummation of leases, such as legal fees, commissions, etc. For sales-type
leases, profit or loss is recognized upon inception of the lease. In keeping with
the matching principle, the costs of consummating that lease should be taken into
income at the same time as the resulting profit or loss. Therefore, initial direct
costs for sales-type leases are expensed currently.

5) SFAS 13 specifies that, in an operating lease, the lesser should recognize rental
revenues on a straight-line basis. This means that a lease bonus should be
recorded as unearned revenue and recognized as rental revenue over the life of the
lease.

Lease bonus (fee)
At the inception of the lease, the lessee may pay a nonrefundable lease bonus (fee) to the
lessor in order to obtain more favorable leasing terms (e.g., a lease term of 3 years instead
of 5 years). The lease bonus (fee) would be treated as unearned rent by the lessor and
would be amortized to rental revenue on a straight-line basis over the lease term. The
lessee would treat the lease bonus (fee) as prepaid rent and would recognize it as rental
expense over the lease term on a straight-line basis.