Leases

Topics: Lease, Finance lease, Leasing Pages: 1 (723 words) Published: October 30, 2014

Client 1 - LeasesACC/541October 20, 2014Christine ErricoClient 1 - LeasesThe client has a few options to consider when deciding on whether to purchase or lease an additional 20 trucks to satisfy the necessary 120 in order to take on their new customer’s project. While there are tax advantages that come along with purchasing new trucks and adding to their assets, they will also be adding to their debt. Also, the advantages involved with leasing the 20 extra trucks outweigh the disadvantages because leases are generally less costly than other forms of financing the costs to acquire the trucks, and the company will have more flexibility financially because they won’t have to necessarily take on ownership of the trucks. There are a few different type of lease structures that the trucking company will have to decide between based on their needs. Sales-type and direct finance leases are both forms of capital leases. At the time of inception, if a lease is to be classified as a capital lease, the ownership of property must be transferred to the lessee by the end of the lease, or the lease must contain a bargain purchase option, or the lease term must be equal to 75% or more of the estimated economic life of the property, or the present value of the minimum lease payments must equal or exceed 90% of the fair value of the property. If none of these circumstances are met, the lease is classified as an operating lease, which is basically accounted for as a rental agreement because it has no effect on the balance sheet. In addition to one of the four circumstances listed above, in order for a capital lease to be classified as a sales-type or direct finance lease, the collection of payment must be reasonably predictable and the lessor’s performance must be substantially complete or the future costs must be reasonably predictable. If a sales type lease is used by the trucking company, it would be similar to a purchase in that the company will receive use of the trucks...
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