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Client Lease Research

In: Business and Management

Submitted By mferg1118
Words 965
Pages 4
Client Lease Research
Melinda Ferguson
ACC/541
March 5, 2012
Valerie Turnbow

Client Lease Research
A lease is an agreement between two parties where one party makes payments to another party for the use of an asset over a certain time period. Leases are classified as a capital lease or an operating lease depending on the lease agreement. A capital lease is when the lessee purchases the asset at the end of the lease, if the lease agreement meets one of the four criteria of capital leases. Capital leases can be classified as a direct financing lease and sales-type lease. This memo will explain the structure and issues of lease.
A capital lease is when an agreement is made to purchase an asset that is financed by the lessor through payments over a certain time period. In order for the lease to be classified as a capital lease it must meet one of the four criteria of capital lease: “the lease transfers ownership of the property to the lessee by the end of the lease term, the lease contains a bargain purchase option, the lease term is equal to 75 percent or more of the estimated remaining economic life of the leased property, and at the beginning of the lease term the present value of the minimum lease payments equals or exceeds 90 percent of the fair value of the leased property less any related investment tax credit retained by the lessor” (Schroeder, Clark, & Cathey, 2011, pp 432-433). Once a lease has been determined to be a capital lease, the lease agreement must meet the two criteria of lessor certainty in order to be classified as a sales-type lease or a direct financing lease: “collectability of the minimum lease payments is reasonably predictable and no important uncertainties surround the amount of non-reimbursable costs yet to be incurred by the lessor under the lease” (Schroeder, Clark, & Cathey, 2011, pg. 433).
If a lease does not

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