Question

Crime Control Co. accounts for a substantial part of its alarm system sales under the sales-type
(capitalized) lease method. Under this method the company computes the present value of the total receipts it expects to get (over periods as long as eight years) from a lease and records this present value amount as sales in the first year of the lease. Justification for this accounting is that the 8-year lease extends over more than 75% of the 10-year useful life of the equipment. While the sales-type lease method is used for financial reporting, for tax purposes the company reports revenues only when received. Because first-year expenses of a lease are particularly large, the company reports substantial tax losses on these leases.

Required:
a. Critics maintain the sales-type lease method “front loads” income and that reported earnings may not be received in cash for several years. Comment on this criticism.
b. Will financial reporting income be improved from the company’s tax benefit?
c. The company insists it can achieve earnings results similar to those achieved by the sales-type lease method by selling the lease receivables to third-party lessors or financial institutions. Comment on this assertion.



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  • CreatedJanuary 22, 2015
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