Two common types of leases are operating and financing leases

#1. Two common types of leases are operating and financing leases. In your own words, describe and share examples of each. What are the major differences in accounting for each of these two types of leases?

#2. An operating lease is a short-term agreement between an owner and renter (lessee and lessor). At the end of the agreement the owner maintains ownership. The income and expense are recorded on the income statement.  I have a client who owns several apartment complexes and rents out the units. The lease agreements are for a period of a year and rental payments are collected monthly. The maintenance obligations are the responsibility of the owner. The rent collected is recorded to income. The rental costs are expensed. A finance lease is a long term agreement and the item that is being financed is recorded as an asset on the balance sheet. The cost of the asset and interest expense are calculated at a predetermined rate and the person who is making the periodic payments of the finance lease will have the right of ownership at the end of the lease term. Another client took on a five-year finance lease for the purchase of a cryosauna for the business. The client aka lessee records the value of the asset and the obligation of the lease on the balance sheet. For every payment a portion of the principal payment is made as well as interest. The principal payment reduces the liability and the interest portion is expensed. The cost for repair and maintenance on the equipment is the lessee’s responsibility but the lessee also gets the tax benefit of depreciating the equipment. At the end of the lease the lessee will have complete ownership of the asset. Professor Post:

#3. What are the differences between a direct-financing and a sales-type lease for a lessor?