Acc/541 Reporting Paper

Memo

To: | Client Request 1 |

From: | Tmekka Peterson |

Date: | August 17, 2015 |

Re: | Leases |

| |

The opportunity of expanding a business has presented the company with new obligations that it does not have any experience dealing with. There are many rules and options for the company when it comes to the purchase of additional assets. The company has to make a financial decision based on being unsure of the buyer’s long-term relationship. This will cause the company to research leases as outlined by the Financial Accounting Standards Board (FASB) website. In particular the current practice and thought related to direct financing, sales type, and operating leases.

Classification

A lease will be classified as either capital or operating leases. Capital leases will meet at least one of the following as outlined by FASB in section 25-1.

a. Transfer of ownership

b. Bargain Purchase Option

c. Lease term is equal to 75 percent or more of the estimated economic life of the leased property. However, if the beginning of the lease term fall within the last 25 percent of the total estimated economic life of the lease property, including earlier years of use, the criterion shall not be used for purposes of classifying the lease

d. Minimum lease payments. The present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at lease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor. If the beginning of the lease term falls within the last 25 percent of the total estimated economic life of the leased property, including earlier years of use, this criterion shall not be used for purposes of classifying the...