Financial_Accounting

| |Client Request I | Memo To: Client Request I “Regional Trucking Company” From: Accounting Firm Date: 10/24/2010 Re: Trailer Leasing Options The purpose of this memo is to identify information on leasing in the Financial Accounting Research System (FARS) and recommend an approach to dealing with the situation with new cliental. Outlining the current practices related to direct financing, sales-type, and operating leases will be discussed. If a lease is defined as a captial lease which is where the lesser transfers much of the liabilities to the lessee, it will be considered a direct financing or sales-type lease. Direct fianancing lease is used when manufacturer or dealer decreases the record keeping of profit or loss on inventory, where they do with sales-type lease. A sales-type lease indicats earnings on gross profit. An operating lease is defined as a rental agreement. Capital lease are long term leases of items that are not technologically based, an example of this would be machinerys. Capital leases are known to benefit and drawback of ownership, so with this they are considered depreciated as assets. The Financial Accounting Standards Board (FASB) requires the following (one) to be met 1. Title to equipment passes automatically to the lessee by the decreasing time of the lease term. 2. An option to purchase the equipment at the end of the lease for substanitally less than fair market value. 3. Lease terms are greater then 75 percent of the equipments useful life. 4. Present value of the lease payment is greater than 90% of fair market value of the equipment at hand. Direct financing leases are a record of total minimum lease payments that are received within a dated transaction. Unearned income is then stated by the different between the amount and asset cost. Rental payment increases received overall reduce the full amount of payments, portions of unearned income is tranferred into earned income with this step. The interst revenue is recorded thus as a revenue by the lessor only. A sale-type lease is an arrangement by a firm leases its own equipment. A sales-type lease is known as a up-front sales transaction and not a direct financing lease’s gradual method. The crtitical event at hand is considered the sale while the direct costs associated with the lease agreement are written off when the sale is recorded on the income statement as a selling expense. With all the above stated within this company 120 trailer, 20 trailers more than this company currently owns if up for configuring. With the knowledge of uncertainty about the company this agreement of a operating lease would be a wise idea for the first few months (3-6) and then upon the understanding an increase to capital lease would be benefical to the company. If upon the agreement of both parties the short time lease of operating lease will be put into effect starting tomorrow, October 24, 2010 while the capital lease will then after six months will take into effect. If this is not agreed upon then in the interest of the company at hand then a capital lease agreement would benefit the companies uncertainty overall.