Response to Client Request

Response to Client Request one

Response to Client Request one

Emina Jakupovic

ACC/541

Monday, June 07, 2010

Professor: Kenneth Quirk

Response to client request one

MEMO

To: Hamtramck Trucking Company

From: Accounting Firm

Re: Trailer Leasing Options

The purpose of this memo is to explain Financial accounting research System standard practice related to leasing options.

Lease can be a capital lease when the lesser transfers much of the liabilities, to the lessee. The capital lease can be sales lease or direct financing lease. When the manufacturer does not record profit on the balance sheet, this transaction is under category direct financing lease. When profit is record on the balance sheet as an earned gross profit than this type of transaction is sales type lease. Lease not capital is operational lease.

The FASB and special standards No 13 established four criteria to categorize capital and operational lease. If any of the requirements is met, lease is capital. If not, lease is operational.

1. At the end of the lease term, the lease is transferring ownership to the lessee.

2. At “barging price” lessee can purchase property or asset

3. Greater then 75% or equal life of the lease term is.

4. Minimum lease payments and present assets are equal or exceed 90% of the fair market value of the property or asset.

Accounting reporting requires recording of all lease payments as a receivable. Amount different between unearned income, and asset cost is treat as a difference. To simplify and give

Response to client request one

some symmetric to accounting system, each payment receive will reduce receivable account for the full amount of the same payment. Unearned income is treat as earned income.

Lesser record interest revenue in direct financial lease.

Sales –type lease is not treat as a direct financing lease. Sales-type lease is treat like up-front sale. Record is require...