John is an accounting analyst at GT Inc., a large, publicly-traded

forestry company that focuses on selling pine trees to smaller greenhouses throughout

Canada. This year, GT Inc has decided to lease some large sections of straight fencing to

keep wild animals such as deer from eating the tree branches before the trees are large

enough to be shipped to customers.

GT Inc. decided to enter into eight leases, each for a large section of fence at $200 per

section, for a period of 12 months, to see how well the fences work at protecting the

trees. GT Inc will be required to connect the various pieces of fencing together to create the

appropriate size of the contained area to protect the pine trees. John has suggested to

GT chief operating officer that GT may only need five or six pieces of the fencing to

create a large enough containment area but since the leasing costs are so cheap, it

is worth leasing all eight fencing sections for now until GT has the fencing on-site and

can test out different numbers of sections to get the optimal size. If the fencing works

well,GT is able to extend the leases for another year for $20 per section.

Based on his online research, John believes that GT can purchase fencing that is

almost the exact same fencing from another company, Striders Structures Inc. (SSI).

According to SSIs website, each new piece of fencing sells for approximately $750.

Required:

a) Describe in detail the two main exemptions that allow a lessee to be able to expense

a lease, instead of recording the capital asset and lease obligation.

b) Using case facts, analyze in detail whether GTs leases of fencing sections meet

each of the lease exemptions described in part (a), and provide an overall

recommendation as to whether GT should record the leased assets and obligation

on its books (like a finance lease) or expense the lease payments throughout the

lease period (like an operating lease).