1. Account for an operating lease, realizing that the only liability to be reported are amounts that are currently due.
2. Understand that the only asset reported in connection with an operating lease is prepaid rent if payments are made in advance.
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3. Record the initial entry for a capital lease with both the asset and the liability calculated at the present value of the future cash flows.
4. Explain the interest rate to be used by the lessee in determining the present value of a capital lease and the amount of interest expense to be recognized each period.
5. Determine and recognize the depreciation of a leased asset.