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Benefits of Leasing

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Benefits of a Capital Lease
December 3, 2012

MEMORANDUM
TO: Trucking Company, Inc.
FROM: Accountant
DATE: December 3rd, 2012
SUBJECT: Benefits of a Capital Lease
CC: John Smith, Supervisor

In response to your request for more information on the topic of leases, I will explain the different aspects of leases to help you get a better understanding of the topic so that you may make an informed decision on which type of lease is best for your company.
Capital Leases
A capital lease emulates an installment purchase of an asset. This type of lease transfers the benefits and risks associated with ownership of an asset to the lessee (Schroeder, Clark, & Cathey, 2011). According to ASC 840-10-25 (FASB, 2009) (IAS 17), a lease must meet at least one of the following four criteria to be considered a capital lease: a. Ownership is transferred by the end of the lease agreement. b. There is a chance to purchase at a bargain price. c. The length of the lease is 75% or more of the assets life. d. The sum of the minimum payments, calculated at present value, exceed 90% of the assets fair value.
Criteria c and d do not apply if the term of the lease begins in the final 25% of the assets useful life.
Two Types of Capital Leases There are two types of capital leases concerning the lessor; direct financing and sales-type leases. For a capital lease to be considered a direct financing or sales-type lease, according to ASC 840-10-25 (FASB, 2009), both of the following must be true. a. There must be reasonably predictable collectability of the minimum lease payments. b. There must be no uncertainties regarding the amount of un-reimbursable costs resulting from the lease yet to be incurred by the lessor.
If these requirements are met, and the lessor is a dealer or a manufacturer the lease would be considered a sales-type lease. Otherwise, if

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