Hi There!
We just started a new lease, and I am have a few challenges recording it.
Firstly, I cannot decide if it is a capital or operating lease.
We have the option of purchasing the vehicle for $15,000 at the end of a 3 year lease. The lease payments for three years is $700/mo, and the terminal value of the vehicle is $22,875.00

If the buyout was a much smaller amount, I would feel pretty confident that it was a capital lease. But because it is $15,000, and only an option, I feel torn that it may be an operating lease. BUT the terminal value is $22,875. So the buyout is at a discount.

And if I were to enter the lease as an operating lease, how would the purchasing journal entry go in three years? To simplify this, I would like to put it in as an operating lease, expensing the lease payments. Then, in three years, if the owner decides to purchase the vehicle, put the entry in as Assets increasing by $22,875, Bank decreasing by $15,000, and lease expense decreasing by $7,875. 

Or do I treat this as a capital lease. As far as I understand that, I put it in the books as if it were a liability, increasing the Assets by $40,000 (the value of the truck), and calculating what the lease payments translate to if it were financing.

Any assistance in this quandary would be much appreciated! And help for years to come!!!!
Thanks so much!
Naomi
>^,,^<