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Client Memo

In: Business and Management

Submitted By amlswift
Words 718
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Client Memo

To: Bob Supervisor
CC: Joe Schmoe, Schmoe Trucking
Date: 8/26/2013
Re: Leasing Options

Schmoe Trucking has been presented with an opportunity that will require adding an additional 20 trailers to the ones they currently own. While there is an uncertainty to the length of the potential relationship, there is considerable potential for growth. As requested, I have spent the past few days examining the current FASB standards on leases to determine what the best course of action for Schmoe Trucking would be.
There are a number of options when it comes to leasing, and it is vital that each option is examines in order to determine the proper course of action. There are a few things about leases that must be looked at before determining how to proceed. Leases are broken down into two categories; operating leases and capital leases. A capital lease is one that meets certain criteria and capital leases can be broken into subcategories; sales type leases and direct financing leases. We will be looking at the differences between sales type leases, operating leases, and direct financing leases in relation to the proposed acquisition of additional trailers. The first step is to determine if a lease is an operating lease or a capital lease. A capital lease will meet at least one of the following criteria. SAFS No. 13 outlines the capital lease criteria to be as follows; transfer of ownership of the leased item upon completion of the lease period, a bargain option is included in the terms of the lease, the period of time covered by the lease is at least 75% of the expected economic life, unless the period falls within the final 25% of the expected economic life, or the present value of the lease payments is the equal to or exceeds 90% of the fair value of the leased item (FASB Accounting Standards Codification, 2013). In addition to...

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