Power Station Case Study

TO: xxxx, CFO FROM: xxxx, Senior Accountant DATE:June 30, 2009 SUBJECT: method of accounting for Leasing Arrangement with susceptibility Corporation As you requested, I fork up analyzed the proposed leasing arrangement with zero Corp. Based on my analysis, the trounce cream is to leverage the turbines quite than book on them. OVERVIEW: causation home is contemplating whether to enter into a sale- renting fend for consummation with nil Corporation. office staff property will grease ones palms turbines and nowadays dole out them to nothing Corp. who will then lease them back to Power grade. According to the regulations, Power Station is required to bribe and take title to the turbines. At the end of the 5-year lease term, Power Station has the option to buy the equipment at fair securities industry value. If the option is non exercised, Power Station is responsible for de-installation salute ($7 million) and the cost to ship and install the equipment at a new grade ($7.3 million). ISSUE: Whether Power Station should lease the turbines through Energy Corporation using a sales-leaseback deed? At the consequence of the lease, should Power station exercise the purchase option to buy the equipment?

ANALYSIS: The leasing arrangement is considered a sale-leaseback traffic because it involve[s] the sale of property by the owner and the lease of the property back to the vendor (FAS 28, 1976, ¶2). The lease agreement is classified as an operating lease because it does involve a transfer of ownership, a bargain purchase option, a term of greater than 75% of the turb ines useable life, or minimum lease payment! s that kick the bucket 90% of the equipments fair value (1976, ¶7). Power Station would solely record a credit to cash and a account to lease expense for the payment amount distributively of the 5 years in the lease term. Power Stations may benefit from entering into the sale-leaseback transaction because the turbines would not ingest to be reported on the balance sheet, which would jockstrap march on their current and debt-to-equity...If you want to get a replete essay, say it on our website: BestEssayCheap.com

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