Question

yesterday I renewed our building lease for the next 3 years. I know we might move sooner than that, but it was cheaper this way. You mentioned that we only have the funds to operate for the next 16 months, but I'm confident things will look up soon. Thanks, Sheila Dawson CEO How should Sporting Supply recognize its building lease?

Answer 1

Lease is the contractual arrangement for the lessee to pay the lessor for the use of an asset An operating lease is treated like renting, payments are to be considered as operational expenses and it will be shown in the profit and loss statement. Asset being leased stays off the balance sheet. Operating lease is right to use only. Risks and benefits remain with the lessor, lessee pays only maintenance costs. Lease payment is a rental expense. The lease expense should be recognized in equal parts over the tenure of the lease i.e., 36 months In the present case, lessee should recognize the lease as operating lease. Since, the lease period is short, it means for 3 years. Therefore, in this case, the company should recognize its building lease is as operating lease over the lease period of 36 months.