Question - You are the bookkeeper at a small manufacturing company. The owner has just purchased a new forklift to help transport work product throughout the facility. The owner wants to treat this, as he does renting any other equipment, as an operating lease and expense the payments each month to rent expense. You realize that the lease agreement meets the definition of a capital lease because it has a bargain purchase option. The owner is concerned because the bank has a covenant that relates to a minimum current ratio and also restricts capital expenditures.
Please write a memo to your boss (me) discussing the reason why the lease meets the capital lease requirements and needs to be capitalized under Generally Accepted Accounting Principles (GAAP). In your memo you should provide the requirements of what makes this a capital lease and how it will impact the balance sheet and interest and depreciation expense on the income statement over the course of the lease term.