To:Rudolph Blitzen, Financial Manager
From:Jen DeSimio, CPA
Subject:Lease Options for New Trailers
Princess Regional Trucking Company has been approached by a client with an opportunity that would require 120 trailers which is about 20 more than we currently own. We are not sure how long the relationship with this customer will last but this deal has the potential for considerable growth. I have a great deal of information for you regarding lease options that Princess Regional Trucking Company may want to consider before going forward with this deal.
The first type of lease to consider is the direct financing lease. This lease is used by lessors in capital leases if the collections of minimum lease payments are guaranteed and the amounts of unrefundable costs are known in advance. In this type of lease the bank will buy new trucks and lease them to us instead of Princess Regional Trucking Company borrowing the money to purchase the trucks. The direct financing approach is the same as a loan. In order to arrange this type of lease we must show that the monthly payment will be met every month on time. This can be done by putting up assets to cover the payments just in case we cannot lease what is secured by the direct lease. Eliminating any question or doubt about the ability to cover the lease is the ultimate goal.
If you would prefer to go with the Capital lease option then it must meet one of the four criteria according to FASB ASC 840-10-25-1. There has to be a transfer of ownership to the lessee by the end of the lease term, the lease contains a bargain purchase option, the lease term is equal to 75% or more of the estimated economic life of the leased property, or the present value at the beginning of the lease term of the minimum lease payments, equals or exceeds 90% of the excess of the fair value of the leased property. If any of the four criteria is met and...