Client Response 1

Response to Client 1
Candace Schneider
December 10, 2012
Rebecca Kime

TO: Kane White, Consultant Engagement Supervisor
FROM: Candace Schneider
DATE: December 10, 2012
SUBJECT: Leases and Lease Structure Issues
CC: Client
Recently one was given the opportunity to research lease options for Regional Trucking Company.   In summary, this company was approached by a new customer with an opportunity. This opportunity would require 120 trailers, which is 20 trailers more than the trucking company owns. Regional Trucking Company is uncertain how long its relationship with this client would last, but knows this opportunity presents a potential for significant growth for the company. In researching the lease options available that Regional Trucking Company may consider as identified on the Financial Accounting Standards (FASB) Board Website. One thought she would take a few moments to familiarize one with three specific lease options   available to the client, which are direct financing, sales type, and operating leases.

Direct Financing Lease
A direct financing lease is “also known as a direct lease” (Wise Geek, 2003, para. 1).   A direct lease is a type of lease that contains one or more of the characteristics of a capital lease as well as some additional requirements.   This type of lease also involves non-leverage, which means a lessor cannot be a dealer or manufacturer. In this lease the lessor purchases the property like the 20 trailers for the main purpose of leasing the asset.

The FASB states a lessor in this type of lease can recognize its gross investment in the lease and unearned revenue. The lessor can recognize unearned revenue if a difference exists between the gross amount investment and the cost of the leased asset. The lessor can amortize that income, which can create “a form of interest income throughout the life of the direct lease” for the lessor (Wise Geek, 2003, para. 3). This causes the...