Summary: Response To Client Request I
Response to Client Request I
Andrea Smith
ACC/541
August 12, 2013
Kim Swallom-Gill
Response to Client Request I | Smith Financial |
Memo
To: | Kim Swallom-Gill | From: | Andrea Smith | Date: | August 12, 2013 | Re: | Response to Client Request I | | |
Our client, a regional trucking company, recently received an opportunity with potential of growth and doing business with new customers on a larger scale and is uncertain of the length of this relationship. We recommend acquiring extra trailers on lease instead of spending significant capital to acquire the same. This memo is intended to inform you on specific leasing information in the Financial Accounting Research System (FARs) and create a recommendation for our client …show more content…
Simply put, the lessor purchases the asset for the purpose of leasing it. In a direct financing lease, the lessor is not a manufacturer or dealer in the item; the lessor purchases the property from the lessee. The lessor uses the interest rate implicit in the lease to discount the future payments from the lessee. “The difference between the gross investment in the lease and the gross investment in the lease and the cost of the leased property is resulting in interest income over the life of the lease. Initial direct costs of the lease are expense” (Barron’s Accounting Dictionary, 2011). The capital leases transfers all the benefits and risk to the lease and lessee record the property acquired as asset and liability on the balance …show more content…
According to Schroeder, Clark, & Cathey (2011), “The lessor should report a lease as a sales-type lease when at least one of the capital lease criteria is met, both lessor certainty criteria are met, and there is a manufacturer’s or dealer’s profit (or loss). This implies that the leased asset is an item of inventory and that the seller is earning a gross profit on the sale”. In a sales-type lease the lessor records operating profit equal to the difference between the discounted minimum lease payments and the carrying amount and records interest income over the lease term. These leases are usually relevant to dealer and manufacturer lessors who also make a gross profit at the inception of the lease together with periodic interest
Andrea Smith
ACC/541
August 12, 2013
Kim Swallom-Gill
Response to Client Request I | Smith Financial |
Memo
To: | Kim Swallom-Gill | From: | Andrea Smith | Date: | August 12, 2013 | Re: | Response to Client Request I | | |
Our client, a regional trucking company, recently received an opportunity with potential of growth and doing business with new customers on a larger scale and is uncertain of the length of this relationship. We recommend acquiring extra trailers on lease instead of spending significant capital to acquire the same. This memo is intended to inform you on specific leasing information in the Financial Accounting Research System (FARs) and create a recommendation for our client …show more content…
Simply put, the lessor purchases the asset for the purpose of leasing it. In a direct financing lease, the lessor is not a manufacturer or dealer in the item; the lessor purchases the property from the lessee. The lessor uses the interest rate implicit in the lease to discount the future payments from the lessee. “The difference between the gross investment in the lease and the gross investment in the lease and the cost of the leased property is resulting in interest income over the life of the lease. Initial direct costs of the lease are expense” (Barron’s Accounting Dictionary, 2011). The capital leases transfers all the benefits and risk to the lease and lessee record the property acquired as asset and liability on the balance …show more content…
According to Schroeder, Clark, & Cathey (2011), “The lessor should report a lease as a sales-type lease when at least one of the capital lease criteria is met, both lessor certainty criteria are met, and there is a manufacturer’s or dealer’s profit (or loss). This implies that the leased asset is an item of inventory and that the seller is earning a gross profit on the sale”. In a sales-type lease the lessor records operating profit equal to the difference between the discounted minimum lease payments and the carrying amount and records interest income over the lease term. These leases are usually relevant to dealer and manufacturer lessors who also make a gross profit at the inception of the lease together with periodic interest