Response to Client Request I
While working on a consulting engagement, a supervisor in your team has given you an assignment. The client is a regional trucking company. A new customer has approached the client with an opportunity that will require it to utilize 120 trailers—20 more than the trucking company currently owns. The client is unclear how long the relationship with the customer may last, but the deal has the potential for significant growth. Your supervisor has asked you to research issues in the Financial Accounting Research System (FARS) relating to leases and lease structures, in particular the current practice and thought related to direct financing p12, sales type p14, and operating leases p 14.
• Write a 700- to 1,050-word memo addressing your supervisor that summarizes your FARS research results.
TO: Regional Trucking Company
FROM: Accounting Firm
RE: Trailer Leasing Options
The purpose of this memo is to clarify leasing information in the Financial Accounting Research System (FARS) and recommend an approach to dealing with the situation with your new client. Specifically, I will outline current practices relating to direct financing, sales-type, and operating leases.
Essentially, if a lease is defined as a capital lease (one in which the lessor transfers much of the liabilities to the lessee), it will either be considered a direct financing or sales-type lease. A direct financing lease is utilized when the manufacturer or dealer does not record a profit or loss on the inventory, whereas they do with a sales-type lease indicating that they are earning a gross profit (Schroeder, 2005). If it is not a capital lease, it is referred to as an operating lease (one that serves principally as a rental agreement).
The current practice involving direct financing leases requires the recording of the total minimum lease payments as a receivable on the date of the transaction and treating the difference between that amount and...