Response to Client Request I: Direct financing, sales type, and operating leases

Response to Client Request I: Direct financing, sales type, and operating leases
Name
Course
Instructor
Date
MEMO
Date:
To:
From:
RE: Trailer leasing options
The main aim of this memo is to clarify information about leasing options under the Financial Accounting Standards Board (FASB). It will also give recommendation on the leasing options pertaining to the new client. In essence, the memo will delve into sales type, direct financing and operating leases.
I appreciate you giving me this assignment, and the opportunity that has arisen with the new client has potential to improve growth for the company. Nonetheless, there is uncertainty on business relations, as there is little information on whether the client will be a regular customer. As you are aware there are already 100 trailers available, but an additional 20 trailers would improve the company’s prospects. Hence, the need for leasing options necessitated me to look into the accounting treatment of leases in the FASB website and note down relevant details for this deal.
While accounting for leases, inception of the lease means the date there is determination of lease classification. Essentially, classification enables recording of beginning of lease term, which needs to already have been determined as per the date of inception. The inception of the lease now captures the need to take into account the date when property is acquired, date of lease agreement or any prior commitment (FASB, 2014).
A capital lease also referred to as a financial lease relates to a situation where there is transfer of liabilities from the lessor to the lessee, and the lease can either be considered a sales type lease or direct financing lease. The sales type lease applies when a manufacturer leases an asset to a lessee. Since the lessee uses the asset in exchange for periodic periods it is similar to a purchase, but the asset is returned to the lessor upon lease expiration. A direct finance lease takes place when the lessor merely rents and leases an asset, without the lessor being a dealer or manufacturer of the property or asset. Both types of leases are similar as the lessee pays the lessor for exchange of property. If a lease is not a capital lease it is an operating lease akin to a rental agreement.
Nonetheless, under the direct financing lease, a dealer or manufacturer does not record inventory profit or loss, but under the sales type lease it is required that one has to record earning and losses through comparing the payments received and value of asset. Similarly, under the sale type lease the lessor expects to earn interest plus ...