Response to Client Paper
- Submitted by: breec51
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- Category: Other
- Date Submitted: 10/09/2011 02:24 PM
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I would like to thank you for the opportunity to discuss with you lease options for your company. There are three options we would like to introduce and will, based on the information given and researched, make a recommendation for your company.
There are three lease types we wish to present to you: Direct Financing, Sales-type lease, and operating lease.
The Financial Accounting Standards Board has set rules, regulations and criteria that directs what these leases are, and what they shall and shall not include.
Direct Financing Lease:
Direct financing lease: If a lessee transfers ownership of the lease to the lessor by the end of the lease term(Financial Accounting Standards board, 2011); If the lease contains a bargain purchase option(Financial Accounting Standards board, 2011); If the lease term is 75 percent or more of the estimated economic life of the leased property; or if the present value of the lease term of the minimum lease payments, excluding that portion of the payments representing executor costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals 90 percent of the excess of the fair value of the leased property to the lessor at lease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor(Financial Accounting Standards board, 2011).
It must not give rise to manufacturers or dealer’s profit (or loss) to the lessor, and it does not meet the criteria for a leveraged lease (Financial Accounting Standards board, 2011).
With this type of transaction the company would rent the trucks from the financial institution without directly borrowing the money.
A Sales-type lease is a lease in which the fair value of the leased property, at lease inception, is greater or less than its cost or carrying amount (Financial Accounting Standards board, 2011); it involves real estate and the property transfers ownership by the end of the lease term, and...
There are three lease types we wish to present to you: Direct Financing, Sales-type lease, and operating lease.
The Financial Accounting Standards Board has set rules, regulations and criteria that directs what these leases are, and what they shall and shall not include.
Direct Financing Lease:
Direct financing lease: If a lessee transfers ownership of the lease to the lessor by the end of the lease term(Financial Accounting Standards board, 2011); If the lease contains a bargain purchase option(Financial Accounting Standards board, 2011); If the lease term is 75 percent or more of the estimated economic life of the leased property; or if the present value of the lease term of the minimum lease payments, excluding that portion of the payments representing executor costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals 90 percent of the excess of the fair value of the leased property to the lessor at lease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor(Financial Accounting Standards board, 2011).
It must not give rise to manufacturers or dealer’s profit (or loss) to the lessor, and it does not meet the criteria for a leveraged lease (Financial Accounting Standards board, 2011).
With this type of transaction the company would rent the trucks from the financial institution without directly borrowing the money.
A Sales-type lease is a lease in which the fair value of the leased property, at lease inception, is greater or less than its cost or carrying amount (Financial Accounting Standards board, 2011); it involves real estate and the property transfers ownership by the end of the lease term, and...