Response to Client Request 1
RE: Trailer Leasing Options
I want to address the leasing options that are available for Regional Trucking Company which has been approached by a new customer with the opportunity that would require 120 trailers – 20 more than the trucking company currently owns and is uncertain how long the relationship with the customer may last but has the potential for significant growth. I want to inform you of information regarding lease options that Regional Trucking Company might consider as identified on the Financial Accounting Standards Board (FASB) website. In this memo I will cover in specific direct financing, sales type, and operating leases.
The first type of lease that I want to address is the direct financing lease where interest is the lessor’s only means of revenue. A bank or another type of financial institution would buy the asset in this case the trucks and would lease it to Regional Trucking Company. This alternative would be used instead of borrowing money to purchase the trucks. The direct financing approach is the same as a loan.
According to FASB ASC 840-10-25-1 a lease has to meet one of the four criteria otherwise it is considered an operating lease. There has to be a transfer of ownership to the lessee by the end of the lease term, the lease contains a bargain purchase option, the lease term is equal to 75% or more of the estimated economic life of the leased property, or the present value at the beginning of the lease term of the minimum lease payments, equals or exceeds 90% of the excess of the fair value of the leased property. If any of the four criteria is met and also meets both of these criteria’s in that the lease payments have to be reasonable and the costs to be incurred are also predictable the lease is considered to be either direct financing or sales-type (FASB Accounting Standards Codification, n.d.)
The accounting steps for direct financing leases is (gross...