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Case Solution

In: Business and Management

Submitted By waldo2114
Words 257
Pages 2
Problem Statement:
How can Gaylord Bates Company lease a machine without reporting the lease as an asset and liability?
Solution:
There are two classifications of leases, Capital leases and Operating leases. In order for Gaylord Bates to avoid the equipment being put on their balance sheet as an asset, the lease must meet the criteria of an operating lease. In order for the lease to be considered an operating lease it must meet all of the following four criteria: 1) No transfer of ownership at the end of the lease term, 2) No bargain purchase option, 3) the lease term is less than 75% of the estimated 10 year economic life, and 4) the present value of the lease payments ($59,180) is less than 90% of the fair value of the leased property. In order for the lease to meet the final 2 requirements it must be a 7-year lease with a rate of 6% or higher. At 6% the present value of the payments equals $350,187 (87.5% of fair value).
Authoritative Citations:
The citations used were: FASB ASC 840-10-25-1, FASB ASC 840-10-20, and FASB ASC 840-20-25-1.
FASB ASC 840-10-25-1 was used to understand the criteria needed to meet a capital lease. FASB ASC 840-10-20 was used to define the 4 main criteria of a capital lease along with operating leases. FASB ASC 840-20-25-1 explains how expenses are to be accounted for under an operating

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