Response to Client I

Responding to Client I

(Name)

ACC/541

Date

(Professor)

MEMO

TO: Supervisor

FROM:

DATE:

RE: Client Trucking Company Lease Options

The Financial Accounting Standards Board (FASB) website contains accounting information and is a qualified source for data pertaining to company leases. Answers to client questions regarding leases and lease structure issues were compiled from the FASB website. Research was primarily focused on three lease types: direct financing, sales type, and operating leases. The client can use the information recovered in the evaluation and capitalization of the new customer as guidelines for their own company.

The information specified on the FASB website should be used when deciding whether to classify a lease as an operating or capital lease. The criteria that must be met is that of SFAS No. 13 which states that the criteria for classifying a lease as a capital lease are: the lease transfers ownership, the lease contains a bargain purchase option, the lease term is equal or exceeds 75 percent or more of the estimated remaining economic life, and at the beginning of the lease term the present value of the minimum lease payments equals or exceeds 90 percent of the fair value of the leased property less any related investment tax credit retained by the lessor (Schroeder, Clark, & Cathey, 2011).

If none of the previously mentioned criteria is met, the lease will not qualify as a capital lease and will be treated as an operating lease. Additionally, two other types of leases exist; these are known as sales type leases and direct financing leases. In order to be classified as a sales type lease or a direct financing lease there must be at least one of the four essential criteria of a capital lease be met as well as the collectability of the minimum lease payments is required to be reasonably predictable and no important uncertainties surround the amount of non-reimbursable costs that...