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Paper Topic:

Accounting Case Study

Name of Student

Name of Professor

Name of Subject


TO : The Partner

FROM : Accountant

DATE : April 1 , 2008

SUBJECT : The Proper Accounting Treatment for Leasing Super Scan Equipment of

`See Through Inc

This memo is in response to the requirement to analyze and discuss the lease contract in a given case study for See Through , Inc (or the company ) where the latter has entered into lease contract with Super Scan . The issue is to be resolved is how to classify the lease entered into , whether

it is a direct financing , sales-type or operating lease and indicating their respective advantages and disadvantages . This will also determine how to account for the consulting services provided by the See Through Alternative Courses of Action

Alternative I -Classify as Operating lease This alternative is possible only if the lease of asset could not be classified by the lessee as capital lease . To be classified as capital lease , it must comply with any of four specified criteria as required by FASB Statement No .13 as follows (1 ) The lease transfer ownership of the leased asset to the lessee at the end of the lease term (2 ) The lessee has the bargain purchase option (3 ) The lease term is for the major part of the economic life of the asset even if the title is not transferred or (4 ) The present value of the minimum lease payments amounts to substantially all of the fair value of the leased asset at the inception of the lease . Under American standard substantially all ' means at least 90 of the leased asset

It appears however that the lease contract entered into between See Through and Super scan appears to qualify as capital lease under the third criterion . Case facts provide that the lease term is 36 months while the expected life of the leased asset is also 36 months . It may be argued that under American standard , major part ' means at least 75 of the economic life of the asset . Since the lease term is equal to the expected life or 100 of the economic life of the asset , then , this requirement must be deemed complied with

It may be argued further that the third criterion applies because there was no transfer of ownership to the lessee but the lessee shall assume all the risks for damage and destruction during life of the lease as per case facts . The lack of right by the lessee to sell transfer , sell assign or sublease the equipment or the agreement is further proof of lack transfer of title

Thus operating lease is not a possible type of lease for the contract entered into by the parties . Capital lease is classification that is taken from view of the lessee . From the view of the lessor , the capital lease could be viewed as either direct financing lease or sales type lease or leveraged lease . To become a leveraged lease , there is a further requirement , hence it not part of this since . The...

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