I.

GENERAL
Plant and equipment lease agreements are classified as either lease purchase
agreements or lease rental agreements. Generally Accepted Accounting Principles
and governmental regulations require that lease purchase agreements be recorded
as if acquiring capital property. Lease rental agreements affect on future operations
must be disclosed in the notes to the financial statements.

The purpose of this procedure is to define and distinguish between lease purchase
and lease rental agreements, and to outline procedures for recording both types of
transactions.

II. LEASE PURCHASE VERSUS LEASE RENTAL

Each lease agreement must be reviewed to determine if it is a true rental
agreement or an agreement that transfers substantially all the benefits and risks of
ownership of the property.

If, at the inception of a non-cancelable lease agreement, any of the four criteria
listed below are met, then the lease should be classified as a lease purchase:

The lease transfers ownership of the property to the lessee at the end of the lease
term.

The lease contains a bargain purchase option. A bargain purchase option is defined
as a provision allowing the lessee to purchase the leased property for a price that is
substantially lower than the expected fair value of the property at the date the
option becomes exercisable.

The lease term is 75% or more of the estimated economic life of the leased
property.

The present value of the minimum lease payments at the beginning of the lease
term, excluding executory costs, equals or exceeds 90% of the fair value of the
leased property.

Agreements, which meet any of the above criteria, will be considered a purchase of
property equivalent to an installment purchase and recorded as a capital asset in
the accounting records.

If the lease does not meet any of the above criteria, it is considered a lease rental
agreement. The periodic payments, under the terms of the agreement, shall be
recorded as rental expense.

Any lease which may be canceled at any time (with no more than nominal advance
notification or the payment of no more than a nominal penalty) by either the lessor
or lessee is considered a lease rental agreement.

III. CAPITAL LEASEHOLD IMPROVEMENTS

Leasehold improvements should be considered a capital purchase of property when:

The costs of such improvements amount to either 20% of the value of the property
leased or $100,000, whichever is less, and
The lease is non-cancelable by either party for a period of at least five years or has
renewal options which permit it to run for at least five years.
Leasehold improvements meeting this definition should be recorded as capital
assets.

IV. RESPONSIBILITIES
A. PROCUREMENT SERVICES

Procurement Services is responsible for:

Negotiating all lease agreements

Coordinating with Plant Accounting to determine classification as a lease rental or

lease purchase agreement
Issuing the purchase order with the appropriate accounting charge code
Notifying Plant Accounting of any changes relating to an executed lease agreement
If a proposed lease is funded by a restricted WBS element and the lease extends
beyond the term of the restricted WBS element, the requisition must be
accompanied by a written statement from the department chairperson stating that
unrestricted funds will be used to absorb the cost of the unexpired portion of the
lease if the restricted WBS element is not renewed. The unrestricted cost center
must be identified and the individual having budgetary responsibility for the code
must concur; the additional expense will be substitutive rather than additive to any
budget. All requisitions for leases using restricted WBS element must be authorized
by the Office of Sponsored Programs prior to submission to Procurement Services.

B. PLANT ACCOUNTING

Plant Accounting is responsible for:

Coordinating with Procurement Services on appropriate classifications of lease

agreements
Coordinating with Facilities Management personnel on appropriate classification of
leasehold improvements
Maintaining records on capitalized leases and leasehold improvements
Preparing entries into both the Accounting and Plant Accounting systems recording
each capital lease or leasehold improvement
Summarizing for the annual financial report the financial impact, by year, of future
commitments on lease rental agreements on the operations of Duke

V. ACCOUNTING ENTRIES
The following describes the types of entries required to record lease transactions:

A. LEASE PURCHASE AGREEMENTS

1.

INITIAL YEAR CAPITALIZATION

Record the value of the property as an asset and the related obligation as a liability.
These should be recorded at the discounted amount of the future lease rental
payments, excluding any payments to cover taxes and operational expenses other
than depreciation.

To illustrate the calculation of the discounted amount of future lease rental

payments, assume a lease with a term of ten years at $1,500 per year, with a
stated interest rate of 8%. Refer to Exhibit A to obtain the present value factor of
6.7101. Multiply 6.7101 by $1,500 (the annual rental). The value obtained is
$10,065.15 which represents the capitalized value of the asset.

G/L Account Debit Credit

17xxxx
259000

$10,065.15
$10,065.15

The above illustration assumes the first payment on the lease is at the end of year
one. If the first payment is at the beginning of year one, the factor is obtained by
referring to Exhibit A, nine year lease term at 8%. Multiply the factor by the yearly
rental and add $1,500 for year one:

(6.2469 X $1,500)=$9,370.35 + $1,500.00=$10,870.35.

2.

PERIODIC PAYMENTS

Current Fund : Periodic payments on lease purchase agreements should be split

between the amount representing interest (debit G/L account 695000, Interest
Expense) and the amount representing the principal (debit G/L account 663900,
Capitalized Lease Payments). Plant Accounting reviews all payments on lease
purchase agreements periodically to ensure everything is recorded properly.

Example: Accounts charged for year one payment of $1500 per Exhibit B:

Cost Object G/L Account

1XXXXXX

695000

$805.21

1XXXXXX

663900

$694.79

A concurrent entry must be made to record the effect of the periodic payments on
the long-term liability and net investment in plant.

G/L Account Debit Credit

259000
292800

3.

$694.79
$694.79

PLANT ACCOUNTING SYSTEM

Plant Accounting will record lease purchase property in the Plant Accounting system
records under the appropriate 66xxxx G/L account and depreciation class. The lease
purchase property will be depreciated over the initial period of the lease rather than
over estimated useful life.

When a capitalized lease terminates, if Duke does not receive title, the property
should be deleted from the Plant Accounting system.

B. LEASE RENTAL AGREEMENTS

Periodic payments for lease rental agreements should be charged to the appropriate
cost object using G/L account 693400, Equipment Rental, or 697200, Space Rental.
Costs of leasehold improvements not considered capitalized assets should be
charged to the appropriate cost object by debiting the appropriate 68xxxx G/L
account (Maintenance and Repair Expense). No other entries are required for lease
rental agreements.

C. LEASEHOLD IMPROVEMENTS

Leasehold improvements which should be capitalized require the following types of

entries:

Record the capitalized improvements:

DEBIT: G/L 17xxxx Capitalized Assets and
CREDIT: G/L 2928xx Net Investment in Plant

Record the capitalized improvements in the Plant Accounting system under the
appropriate 66xxxx G/L account.
Depreciate all capitalized leasehold improvements to both lease rental property and
lease purchase property over the period of the lease.
When a lease associated with capitalized leasehold improvement terminates, if
Duke does not receive title to the property, the value of the leasehold
improvements should be deleted from the Plant Accounting system.