The Efland Company leases equipment to Orange Company. Efland pays $3,000 initial direct costs in negotiating the lease.
Required
1. Explain what initial direct costs are.
2. Indicate precisely how Efland should account for initial direct costs if this lease is (a) an operating lease, (b) a sales-type lease, (c) a direct financing lease.
3. For a sales-type lease, FASB Statement No. 13 as Amended requires that: “The cost or carrying amount, if different, of the leased property, plus any initial direct costs . . . , less the present value of the unguaranteed residual value accruing to the benefit of the lessor, computed at the interest rate implicit in the lease, shall be charged against income in the same period.” Does this provision require that initial direct costs for sales-type leases be charged to cost of goods sold? Discuss the reasons for or against this accounting treatment.