Leasing Memo

One type of lease worth considering is the direct financing lease. Direct financing is a type of capital lease, similar to the sales-type lease. In both direct financing and sales-type leases, the lessor believes that it will be able to routinely collect the minimum lease payments and is certain about the amount of unreimbursable costs it could still incur (Schroeder, Clark, & Cathey, 2011). The difference between a sales-type lease and a direct financing lease is the lessor involved in a direct financing lease does not manufacture the asset. The lessor also is not a dealer. Instead, the sole reason the lessor buys the asset is to lease it. The lessor does not make a profit at the lease’s inception since the value of the asset is the same as the carrying amount. Instead, the lessor makes a profit on the interest from the lease (Lee, 2003).  
Each payment our client makes will go toward both interest and principal. As the lease progresses, the proportion of interest to principal included in payments will change, with the portion of the payment going toward interest decreasing and the portion going toward principal increasing (Lee, 2003).   At the completion of the term of the lease, the lessor will expect our client to purchase the trailers. However, our client will be able to purchase these trailers at a bargain price. When recording the lease on the balance sheet, our client will record the value of the asset at the lesser of either the present value or the fair market value. Depreciation and annual accrued interest will also be recorded. (Lee, 2003) If our client does not know the lessor’s target interest rate, then we will determine an interest rate based on the interest our client would have paid if borrowing the funds for the purchase of the asset (Schroeder, Clark, & Cathey, 2011).

Direct Financing Lease. (2011). Retrieved April 24, 2011, from All Business: http://www.allbusiness.com/glossaries/direct-financing-lease/4952571-1.html