1. What are the criteria needed for a lease to be classified as a capital (now finance) lease?

2. Create a numerical example that meets the definition of a capital (now finance) lease and describe how the lease would be recorded and subsequent rent payments recorded for both the lessee and the lessor. Within the example note the annual rent payments, term of the lease, discount rate, cost of the asset, current selling price of the asset, and any residual value if used. Discuss first why the lease is a capital (now finance) lease. Describe the debits/credits for both the lessee and the lessor when the lease was entered into and the debits/credits of the first annual payment. The key is that you have an understanding of how capital (now finance) leases are accounted for. This has become a more important topic on recent CPA exams given the huge debate this topic has been in the past few years.