Question: Outline the accounting procedures involved in applying the finance lease method by a lessee.

A lessee is a person who enters into a mutual agreement with the lessor for the transfer of the right to use the asset for a specific time and amount under the lease agreement.

The lessee treats lease transactions as though the asset were being purchased in installments under the finance lease method: a financial transaction in which an asset is acquired and an obligation is formed. In the lessee's balance sheet, the asset and obligations are equal to the lowest of:

1. The present value of the minimum lease payments (excluding executory expenses) throughout the lease period or
2. The fair value of the leased asset at the lease's beginning.

Unless the implicit rate can't be ascertained, the present value of the lease payments is estimated using the lessor's implicit rate (then use the incremental borrowing rate). Each lease payment is allocated between a decrease of the lease obligation and interest cost using the effective interest technique.

If the lease transfers ownership or includes a bargain buy option, the asset is depreciated in accordance with the lessee's standard depreciation strategy for owned assets, taking into account the asset's economic life and residual value. The leased asset is amortized over the lease period if the lease does not transfer ownership or contain a bargain purchase option.