Response to Client Request I

Topics: Lease, Leasing, Finance lease Pages: 3 (804 words) Published: August 19, 2013
Response to Client Request I
Andrea Smith
August 12, 2013
Kim Swallom-Gill

Response to Client Request I
| Smith Financial|
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 as it pertains to their leasing options. Also, this memo will briefly cover direct financing, sales-type, and operating leases in order to make the most informed decision possible. The FASB codification goes into detail about different lease structures and the terms and conditions for lease transactions. The statement of financial accounting standards (SFAS) mentions different lease structures. SFAS No. 13 has specified certain criteria by which lease structures are classified in to capital leases and operating leases. Capital leases have benefits and risks that are transferred to the lessee.

Direct Financing Leases
Lessors in capital leases use the direct financing lease when collectability of minimum lease payments is assured and no important uncertainties surround the amount of non-reimbursable costs yet to be incurred. 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...

References: Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2011). Financial Accounting Theory and
Analysis (10th ed.). : John Wiley & Sons Inc..
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