Your client (as a CPA) or employer (working in corporate accounting) operates a

Question

Your client (as a CPA) or employer (working in corporate accounting) operates a large warehouse, packaging and shipping inventory for other companies. (Somewhat like UPS, but without airplanes and trucks.) One of the key operations involve sealing a box, weighing it, and printing a shipping label. That process is completed by a single machine, referred to as Packer #1.

Packer #1 is leased from another company. The company has determined that the lease is a finance lease under GAAP. As a result, the company recorded an asset (Leased Packing Machine) in the amount of $1,745,000, with an offsetting lease payable in the same amount last year, when the machine was initially leased. If the machine were purchased, its cost would have been about $1,745,000. The lease extends over 10 years, at the end of which the machine is expected to be scrapped and have no other value.

Now the company is planning another lease, the exact same machine (Packer #2). Your client (or boss) asks you this question. "What do we need to do to avoid having this machine show up on our statement of financial position as an asset? And avoid the liability, too? I know we did something like this several years ago and were able to keep everything off the statement of financial position."

Required: What do you suggest to the client/your boss? How could the lease be structured to avoid recording it as an asset. Is it possible? If yes, how? If no, why not? (Be clear and concise.)

Explanation / Answer

Answer)

I would explain my boss that There are changes in accounting policies regarding leases and hence,a financial lease can no more be avoided from showing it in balance sheet.

A lease need not be shown in balance sheet if it is a operating lease.However,in given scenario it couldn't be avoided as it is a financial lease.

Explaination:As Per GAAP, two conditions are comprised to say that above lease in Financial lease namely the lease value is more that 90% and life of asset is more than 75%of life. Hence,It cannot be avoided from showing it in balance sheet as it is financial lease.

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