Lease

1196 words 5 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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(ASC 842-30-35-12(a)) In determining the type of lease, the only possible condition that could make it anything other than an operating lease is if the minimum lease payment is 90% or greater of the fair value of the asset. An issue at hand is whether to use a fair value of $135,000, the price they normally sell the asset for, or a fair value of $125,000, the price Sable’s competitors have recently been selling the same asset for.

Conclusions and Authoritative Reasoning: * In calculating the fair value of the asset FASB summary 13-5-c-i says to use current economic circumstances in the calculations, so in calculating the present value of the MLP you would use $125,000. * Using the implicit rate of 6.93%, the open market present value of the bulldozer of $125,000, and the un-guaranteed residual value of $24,000 the present value of the minimum lease payments equal $125,000 (the open market value of the bulldozer.) * According to ASC 850-10-25-1(d) if the minimum lease payments, excluding executor costs, equals or exceeds 90% of the excess of the present value of the leased asset then it will be considered a capital lease. * Because the minimum lease payments are greater than 90% of the open market present value of $125,000 and a residual future value of $24,000 it should not be considered an operating lease. * The cost for Buildit to create the bulldozer was

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