Leasing assignment Example | Topics and Well Written Essays - 1250 words

Leasing - Assignment Example To this regard, it is evident that United Parcel Service (UPS) is a company that incorporates both the capital or financial lease and the operating lease. The company has an aircraft that is as a result of a capital lease and since it is a long term lease the payment of the principal amount will be paid after 12 years (2009-2021) but some commitments associated with the lease of the aircraft has been legally defeased. Therefore, IAS 17 provides that United Parcel Service recognize the aircraft as both asset and liability at a value that is equal to the lower Present Value and the present value of MLP discounted at the leasers other use incremental borrowing rate (Oppermann 107). Additionally, the asset must be depreciated and with lease rentals paid, the organization must apportion between finance cost and a reduction in liability. The transaction is recorded as follows; The operating lease for UPS is considered to be the rental contract which is short term in nature. The leased asset and the liability associated with the asset are not included in the lessee balance sheet but the lessee may hold the same rights that the lessor holds (Oppermann 110). To determine whether the United Parcel Service have an operating and financial lease, various factors are taken into consideration such as the tax incentives and the non-tax incentives generated by the company under study. In the case of tax incentives if the company has a lower tax rate then the incentives will be classified as operating lease whereas if the tax rate is higher, then it is classified as a capital or financial lease. Another determinant factor of whether the company has both operating lease and capital lease is by the fact that it meets all the prerequisites associated with the operating and the capital lease. For UPS this fact is evidenced by the availability of the