Defaulting Capital Lease Allowances

1. According to the text, companies can actually acquire “property” rights by leasing assets. In a recessionary economy, purchase and lease defaults are rampant. In your opinion, what are the effects of defaulted capital leases to the lessor, lessee and economy as a whole? Should FASB consider rewriting capital lease allowances, even on a temporary basis, until the economy recovers? Give an example to support your opinion.
When companies default on a capital lease, the economy is hurt as a whole. Both the lessor and lessee are hurt financially. The lessor has to cover the extra expense of the property that should be generating income. The lessor also may have to spend more to get a new operation in the building. The lessee loses financial credit and cannot go out an borrow as easily if at all.
One of our contractors we were using to build got into a financial bind with one of their lessee’s a few months ago. The lessee went bankrupt and our contractor lost their main source of cash flow.
The three methods are used but I believe the best to use would be FIFO method. This gives companies the most true statement of what the cost of goods were in a period. Following GAAP and reporting financial statements using the same inventory method help create strong financial opinion. Having a decrease in inventory doesn’t necessarily indicate low company profitability. It really depends on pricing and the economy at the time. For instance, with a pizza business, if they are paying $28 at the start of a period for a case of cheese and it bumps up to $32, the company could switch accounting methods LIFO to get the benefit of the lower priced cheese on the books and overstate income for a period. This would be misleading to investors and would look good on the financials but dishonest since it gives an inaccurate