Lease Structure Recommendation

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to:ABC Company
from:Julian Michaels of ACC/541
subject:lease structure recommendation
date:February 4, 2013

Research into an appropriate lease structure for acquiring 20 additional truck trailers, indicate that the category for an equipment lease depends on the criteria met in paragraph seven and eight of the Statement of Financial Accounting Standards (SFAS) number 13. According to the Financial Accounting Standards Board (FASB), the options available to the client are to get an operating lease, or a capital lease, such as a direct financing or sales lease. The differences and effects each lease has on the company are described below. Capital Lease vs. Operational Lease

A capital lease is known also as a financed lease. It is reportable on the company’s financial statements as an asset and a liability and recorded at the current fair market value. In order to qualify as a capital lease, the agreement must meet at least one of the following criteria: a) Ownership of the leased asset remains with the lessee at the end of the lease term. Usually the lessor charges a small fee for title work. b) The lease agreement contains a bargain purchase option allowing the lessee to purchase the equipment at a price much lower than the projected fair market value c) The lease term is at least 75% or more of the estimated economic life of the asset being leased d) The minimum lease payment is equal to or more than 90% of the market value of the leased property (Financial Accounting Standards Board, 1980)

In addition to the above criteria, a capital lease must also meet both of the following lessor requirements: a) The ability to collect the minimum lease payment is reasonably predictable b) No important reservations surround the amount of non-reimbursable costs not yet incurred by the lessor under the lease (Financial Accounting Standards Board, 1980)

An operating lease is a lease that does not meet any of the...
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