Client Request

TO: Consulting Supervisor

FROM: Accounting Department

DATE: July 8, 2013

SUBJECT: Leases and Lease Structure Issues

The results of the research that was completed on the lease and the lease structures in the Financial Accounting Standards Board (FASB) codification required by the supervisor in response to the request of the client are stated in this memo. The client is a regional trucking company and requires 120 trailers to take on the new job. This is 20 trailers less than what is required. The new job opportunity not only promises growth, but the uncertainty on the length of time the client will work with the new job. The client needs advice on whether to buy or lease the extra trailers required to finish the new job. The research compared three types of leases. Direct financing leases, sales-type leases, and operating leases are compared and evaluated for decision-making.

Direct Financing Lease

The first type of lease is a direct financing lease. According to FASB (n.d.), to be classified as a direct financing lease the lease must meet one of the four following criteria: the lease transfers ownership of the property to the lessee by the end of the lease term; the lease contains bargain purchase options; the lease term is equal to 75 percent or more of the estimated economic life of the leased property; and the present value at the beginning of the lease term of the minimum lease payments equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at the inception of the lease over any related investment tax credit retained by the lessor and expected to be realized by him or her. The direct financing lease must also meet both of the following criteria: it does not give rise to manufacturers or dealer's profit or loss to the lessor, and it does not meet the criteria for a leveraged lease (FASB, n.d.).

Sales-type Leases

According to Schroeder, Clark & Cathey (2011), the lessor reports a lease as a sales-type lease...