Response to Client Request I

Response to Client Request I

Alexius Bermudez

University of Phoenix

ACC/541 Accounting Theory and Research

MBAI1DKS68

August 25, 2014

Rebecca Kime

MEMORANDUM

To: Team Supervisor

From: Alexius Bermudez

Date: 25 August 2014

Re: Lease Structure Issues related to direct financing, sales type, and operating leases

To provide our services to our client, I have assembled four different types of information regarding leases related to direct financing, sales type and operation leases. These leases are in line with the FASB Statement of Financial Accounting Standards No. 13. According to the definition prescribed by the FAS 13, a lease is defined " as an agreement conveying the right to use property, plant, or equipment usually for a stated period of time" (1976). The definition also extends to the transfer or property, plant, or equipment even though the lessor may be called for to provide services and maintenance for the leased assets.

There are four criteria to be considered a lease under FAS 13. These criteria are:

1. The transfer of property ownership by the lessor to the lessee at the end of the lease agreement.

2. It contain a purchase option clause

3. The lease term should be 75 percent or more of the economic life of the leased property.

4. The minimum leased payment should equal or exceed 90 percent of the fair market value excluding the payment represent the executory costs (Insurance, maintenance and taxes).

There are three different leases that will be covered under this memorandum and these are:

Direct Financing

1. As agreed upon between the lessor and the lessee, the minimum leased payment

will be recorded as a gross investment.

2. The unearned income will be recorded as the differences between the gross investment income and the cost or carrying amount.

3. The lease net investment will be calculated as the gross investment in the agreement minus the unearned income.

4. The initial direct cost...