Client Response Ii

Response to Client Request II

Pamela Starkey

ACC 541

September 20, 2010

Dr. Sonja Wilson

Response to Client Request II

MEMORANDUM

Date: Friday, September 17, 2010

To: Roy Rogers

From: Pamela Starkey

Re: Request from Git Er Done Trucking on leasing options

Currently our client, Git Er Done Trucking owns 100 trailers and has been approached by a potential new customer who would require use of 120 trailers. Our client is unsure of the longevity of the new relationship and wishes to explore the option of leasing the additional equipment to meet the need of the potential new client. I have completed the research on leases and lease structures for direct financing, sales type and operating leases, as you requested using the Financial Accounting Standards Board (FASB) website and other various sources. I have summarized the advantages and disadvantages of each below.

Capital Lease

Both sales type and direct financing leases fall under the capital lease category. “To be considered a capital lease, a lease must meet one or more of these four criteria: (1) title of the asset passes automatically from the lessor to the lessee at end of the lease term, (2) lease contains a bargain purchase option under which the lessee may acquire the leased-asset at less than its fair market value at the end of lease term, (3) lease term is for a period longer than the 75 percent of the estimated economic life of the asset, or (4) the present value of the lease payments is greater than 90 percent of the fair market value of the asset at the beginning of the lease term (Business Dictionary.com, 2010).” Capital leases transfers all the risks and rewards of the leased item to the lessee. It is similar to a financed purchase. There are additional criteria to determine whether the lease is a direct finance or sales type lease. First, there should be a reasonable assumption the minimum lease payments are collectable. Second, there are no significant uncertainties of...