1. Deal for a Dozer Sarah Donofrio Melissa Dragun Michael Geltrude
Karan Kalaria
Yumeng Zhang

2. Capital Lease Classification
Overview
Conclusion
Journal Entries
Fair Market Valuation
Capital Lease Classification
Case Facts

3. Case Facts Sable Inc. (Lessor) Buildit Inc. (Lessee) Lease Terms
Assumptions
Types of Leases

4. Capital Lease Classification Criteria
Transfer of Ownership
Bargain Purchase Option
Lease Term
Minimum Lease Payments
-The lease only has to meet one of the 4 criteria
  If at its inception a lease meets any of the four lease classification criteria in paragraph , the lease shall be classified by the lessee as a capital lease.

5. Minimum Lease Payments
Present value of payments equals or exceeds 90% of fair value
$125,000
90.19%
Term = 10 years
Rate = 6.93%
Payments = $16,000
Present Value = $112,741.83
$135,000
89.55%
Rate = 5.45%
Present Value = $120,891.78

6. Fair Market Value
Recent economic downturn impacting construction industry
Reduce selling prices to stimulate sales
$125,000 Fair Market Valuation
The determination of fair value should be made in light of market conditions prevailing at the time, which may indicate that the fair value of the property is less than the normal selling price

7. Capital Lease: Sales-type
Minimum lease payments
Manufacturer’s profit
Reasonably assured payments
No additional costs incurred by lessor
Direct Financing
Leveraged
Since it’s not real estate:
--payments are reasonably assured
--aren’t any uncertainties surrounding the additional costs incurred by the lessor

8. Journal Entries

9. Conclusion Benefits of Operating Tax Deduction for Depreciation
$125,000 as the Fair Market Value
Conservative Approach
Capital Lease
Sales-Type

10. Accounting Standard Codification References
Lease Classification Criteria Minimum-Lease-Payments Criterion for a Lessor Lessee Application of Lease Classification Criteria Lessor Application of Lease Classification Criteria Lessor Application of Lease Classification Criteria Lessor Application of Lease Classification Criteria Defining Fair Value of the Leased Property Defining Fair Value of the Leased Property Defining Fair Value of the Leased Property   (Q&A 01) Sales Type Lease – Lessor Journal Entries Example

11. Thank you! Questions?