yalo

Well you have two types of leases an Operating Lease which records rent charges on the income statement and passes through CFO and does not get capitalize on the balance sheet and a Finance lease which you capitalize the PV of the future lease payments and depreciate over time and you record interest expense & depreciation in your CFO and you report principal payments in your CFF just like if you were purchasing the leased item. Now, US GAAP requires that you use a finance lease when the following 4 criteria are met.

1) Lease term is >=75% of the economic life of the item

2) PV of minimum lease payments are >=90% of FV

3) You transfer the ownership of item at the end of the lease

4) There is a bargain purchase option at the end of the lease.

When recording Finance leases remember that your take the PV of the lease payments and capitalize as an asset and liability on BS. For Cash Flow - multiply the interest rate by the PV and that is recorded as your interest in CFO. Then subtract the interest from the payment and that records your principal in CFF. Each period you will depreciate the item based on its expected life and record as book value. Each subsequent period you will deduct the principal and multiply the interest by the remaining value until the end of the lease.

Oh and remember from level 1, sometimes they trick you with beginning period or ending period lease payments remember to switch your calculator accordingly.

Sorry for detail but I just did this in level 1 in Dec. and I had a note card handy.