MEMO

Memo

Memo

Introduction

The trucking company currently owns 100 trailers and a new client have requested 20 more for a total of 120 trailers for its project. The relationship with the new client is uncertain but at the same time it has potential for significant growth of the company. The uncertainty of the relationship may have an effect on the financial position of the client company. The additional trailers may be obtained by the trucking company through either a lease option or by direct financing. If the trucking company is considering leasing the additional trailers to provide to their new client they must first understand leases and lease issues according to the Financial Accounting Standards Board (FASB). This will help in deciding whether to acquire trucks on lease aur through financing.

Discussion

Leasing is an agreement in which delivery is usually within the prescribed period of time of the right to use property, plant or equipment. The lessee is to obtain the right to use property, plant or equipment and the lessor is to give up this right (Solomons, 2007).

In addition to requiring consideration of whether the accounting for the obligations of a lessee in connection with a lease is governed by the general provisions of accounting for leases or asset retirement obligations, an asset retirement obligation can affect the application of the lease classification criteria. While the FASB indicated in its basis for conclusions that it was not their intent to amend the accounting literature for leases (Statement 143, paragraph B66), the transition provisions of Statement 143 regarding lease classification tests clearly indicate that the FASB contemplated that the accounting for asset retirement obligations and costs had the potential to change the classification of leases as capital or operating leases.

Though leases are usually more costly in the long run than acquisitions, the benefits of ...