1172 Words5 Pages
To: Boss Man, CEO, Sable Inc.
From: Kyle May
Date: April 7, 2016
Subject: Deal for a Dozer

Relevant facts * Sable is a company that manufactures and supplies earthmoving and construction equipment. * Sable sells and leases equipment to its customers. * Sable entered into a contract with Buildit Co. leasing a bulldozer for construction. * The lease term is 10 years and the economic and useful life of the bulldozer is 15 years. * Annual lease payments due at the end of every year will be $16,000. * Buildit is responsible for maintenance, insurance, and tax payments arising from the lease. * The residual value of the bulldozer at the end of the lease term is estimated at $24,000, although no
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All of the different lease classifications have different recording standards. A sales-type lease is defined in ASC 840-10-25-43(a) and states, “A lease is a sales-type lease if it gives rise to manufacturer’s or dealer’s profit (or loss) to the lessor (that is, the fair value of the leased property at lease inception is greater or less than its cost or carrying amount, if different) and meets either of the following conditions,” and the conditions it must meet are the conditions for a capital lease and the payments must be reasonably predictable and no important uncertainties about the payments should be present as stated in ASC 840-10-25-42. The conditions for classifying a capital lease are described in ASC 840-10-25-1. The journal entries would differ from the others as it would include sales revenue in the initial recording. A direct financing lease is defined in ASC 840-10-25-43(b). Again, a direct financing lease must meet the conditions to be classified as a capital lease along with not giving a profit or loss to the lessor and does not meet the criteria for being a leveraged capital lease presented in ASC 840-10-25-1. Direct financing leases recognize a net investment in the lease and selling loss from lease, if applicable. (ASC-840-10-25-7). It would also recognize interest revenue when payments are received. The lease will be considered an operating lease if it does not meet any of the first three classifications of a lease.

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