Have Finance Questions? Ask a Financial Expert Online.
Well, first of all you would determine if you were dealing with an operating or capital lease.
Most leases are simple operating leases, but depending upon the actual terms of the lease, what is being leased and other factors that could indicate in essence a transfer of the risk of ownership to the lessee, then you may be dealing with a capital lease.
An operating lease with 15 years of Prepaid Rent, of say an office building, would normally amortize the Prepaid Rent pro-rata (equally) over the term of the lease.
A capital lease, where the majority of the risks of ownership are transferred to the lessee, is recorded on both the books & records of the lessor and the lessee as if a sale of the property by the lessor to the lessee has take place. The lease payments are treated as payments of the purchase price, using an "interest method", basically using the present value of an annuity of the lease payments over the term of the lease. It is a much more complicated transaction than the accounting for an operating lease.
Do you have any additional follow-up questions?
If not, please remember to rate my response as that is the only way we receive credit for our work.
Thanks very much,