Sales-Type Lease Issues
Response to the following problem:
Jordan Industries manufactures and leases to its customers five-ton construction dump trucks. The lease arrangements are usually as follows:
1. Payments on the lease are due for five years after its inception, but the present value is not greater than 90% of the fair value of the trucks at the time of sale.
2. The trucks revert to Jordan at the end of the lease. Estimated economic life of the trucks is 10 years.
3. No substantial uncertainties exist as to future payments Jordan must make, and potential customers are thoroughly checked for creditworthiness before the trucks are leased to them.
4. Jordan's accountant has informed the company that there are advantages from a reporting standpoint in treating the leases as sales-type instead of operating leases.
Required:
1. Discuss the reasons why Jordan would want to treat the leases as sales-type instead of operating leases.
2. Explain what Jordan should do to treat the leases properly as sales-type leases.