Question - Operating and Capital Leases
Berkeley Corporation wants to expand operations and is considering various leasing arrangements for additional equipment. Berkeley's management has heard the terms capital lease and operating lease mentioned by the accounting department and wants clarification of these terms before signing any lease contracts.
(a) Briefly explain the difference between a capital lease and an operating lease from a lessee's (Berkeley's) point of view. Your answer should include the financial statement impact of each type of lease.
(b) How does a lessee determine whether a specific lease contract is an operating lease or a capital lease? Include at least two of the criteria specified by the FASB in your answer.
(c) Which of the above two types of leases is sometimes referred to as "off-balance-sheet financing?" Briefly explain.