Lease Memo

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Leasing Option Memo for Client
Elizabeth P Grady
ACC 541
December 5, 2011
Leslie Crews

Memorandum to: Client from: Elizabeth Grady, Staff 1 subject: Leasing options memo date: december 5, 2011

Each year the number of leasing agreements continues to grow. There are several advantages of leasing property instead of owning. The company is protected against obsolescence and can receive 100% financing with less cost, fixed payments, and more flexibility (Schroeder, Clark, & Cathey, 2011). The new business opportunity for the client will require 20 more trucks than XYZ Trucking Inc. currently owns. The FASB issued SFAS No. 13, “Accounting for Leases” to establish
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The biggest notable difference is the handling of each on the financial statements. An operating lease is similar to a rental agreement so there is no long-term liability on the balance sheet. It allows the lessee to engage in off-balance sheet financing. This provides several benefits for the company to maintain a good financial position. When a company enters a capital lease the asset is reported on the balance sheet. This results in the debt to total equity increasing and the rate of return on total assets to decrease. The ratios can negatively affect financing opportunities, the corporate bond covenants, and management compensation incentives (Schroeder, Clark, & Cathey, 2011). In addition, the depreciation required on the asset in a capital lease will result in a deferred tax. The funds from operations on the cash flow statement will be higher by the deferred tax when a capital lease is used (Ingberman, Ronen, & Sorter, 1979). The cash from the operations section on the cash flow must be reconciled to remove noncash items during the period (Kieso, Weygandt, & Warfield, 2007). The company will receive benefits from both types of leases; the right option for the company will depend on their needs and strategy.
The recommendation for XYZ Trucking Inc. is to sign a short-term operating lease with a renewal option. The uncertainty by XYZ
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