Client Response Paper I
Accounting Theory and Research
University of Phoenix
Mr. Heber W. Howard
TO: Supervising Manager
RE: Trucking lease options
This memo is intended to inform you on leasing information in the Financial Accounting Research System (FARS) and create a recommendation for the regional trucking company as it pertains to their leasing options. This memo will briefly cover sales-type, direct financing, and operating leases for your information.
If a lease does not meet the criteria for capitalization then it will be classified as an operating lease by the lessee. A capital lease transfers most of the benefits and risks of ownership to the lessee. This should also be accounted for as an acquisition of assets to the lessee. A lease must meet one of four criteria to be considered a capital lease: at the end of the lease the title must be transferred from the lessor to the lessee, the lessee must be able to obtain the asset for less than fair market value, the lease extends for a period of at least 75 percent of the assets estimated economic life, or the lease payments will be greater than 90 percent of the fair market value of the asset at the beginning of the lease. The lessee will pay the full amount of the asset to the lessor without dependency on the residual value of the asset (Schroeder, Clark, & Cathey, 2005).
In the case of an operating lease this is simply a rental agreement and should be accounted for in the same manner as any other lease. Rent payments are to be charged as an expense as they will be payable over the life of the lease.
A sales-type lease is present when there is a profit or loss that affects a dealer or manufacturer. These leased assets are accounted for as inventory by the lessee and are leased as a marketing tool for the company. In a sales-type lease the direct costs that goes along with obtaining the lease agreement is written off when the sale is recorded at the inception of the...