| Course | ACC 497 Advanced Topics in Accounting Research (ACC/497) |
|---|---|
| Week | 5 |
| Paper type | Comprehensive accounting research memo |
| Length | about 1,076 words, 4 double-spaced pages plus title page and references |
| Format | APA 7 student paper |
| School | University of Phoenix |
| Program | BS in Accounting |
| Updated | September 2026 |
Free sample paper for ACC 497 Week 5
Is There a Lease Hiding in the Delivery Contract? A Comprehensive Research Memo on Dedicated Refrigerated Trucks Under a Composite Restaurant Group's Logistics Agreement
[Student Name]
University of Phoenix
ACC/497: Advanced Topics in Accounting Research
Week 5 Assignment
[Instructor Name]
[Date]
The restaurant group, its logistics provider and all figures are composites written for a model paper; standards and research findings come from the sources listed.
MEMORANDUM
To: Chief financial officer and audit committee. From: Technical accounting. Re: Whether the logistics agreement contains a lease.
Facts
A composite restaurant group operates 46 casual dining restaurants in three states and supplies them from a central commissary. In January it signed a five-year agreement with a logistics company to deliver prepared foods and supplies from the commissary to the restaurants. The agreement specifies four refrigerated box trucks, identified by vehicle number in an exhibit, painted in the group's colors and used only for its deliveries. The logistics company provides drivers, fuel, maintenance and insurance. The restaurant group sets the delivery routes and schedules daily through its ordering system. The logistics company may replace a truck only when it is out of service for repair, and it must then provide a similar vehicle until the original returns. The group pays a fixed $22,000 a month plus a mileage charge for fuel.
Issue
Does the agreement contain a lease, and if so, how should the restaurant group account for it?
Guidance
Under the lease standard, a contract holds a lease if, for a stretch of time and for payment, the customer gains the right to decide how a specified item of property, plant or equipment is used (FASB ASC 842-10-15-3; Financial Accounting Standards Board, 2016). An asset is identified if it is explicitly or implicitly specified, and there is no identified asset if the supplier has a substantive right to substitute it throughout the period of use. Control exists if the customer has the right to obtain substantially all of the economic benefits from use of the asset and the right to direct its use.
Is There an Identified Asset?
The trucks are explicitly specified by vehicle number. The logistics company's right to replace a truck applies only while a truck is being repaired, which the guidance treats as not substantive. The company cannot substitute trucks at will, and because the trucks carry the group's branding, it would gain little from moving them to other customers. The trucks are identified assets.
Does the Group Control Their Use?
The group obtains substantially all the economic benefits because the trucks are used only for its deliveries throughout the term. It also directs how and for what purpose the trucks are used: it decides routes, stops and schedules each day, which are the decisions that most affect the benefits from use. The logistics company's operation of the trucks through its drivers does not give it control, since operating an asset according to the customer's instructions is not the same as directing its use. The agreement contains a lease.
Components
The monthly payment covers the trucks and nonlease services: drivers, maintenance and insurance. A lessee may elect, by class of underlying asset, to combine lease and nonlease components into a single lease component (Financial Accounting Standards Board, 2018). The group has elected this practical expedient for vehicles. The fixed $22,000 monthly payment is therefore the lease payment. The mileage-based fuel charge is variable and excluded from the lease liability, recognized as incurred.
Measurement
Because the logistics company's implicit rate cannot be determined, the group uses its incremental borrowing rate for a secured five-year loan, 6.5%. The present value of 60 monthly payments of $22,000 at 6.5% is about $1,124,000. At commencement, about $1.1 million of obligation that management had expected to keep off the balance sheet is recorded, with an asset of the same amount.
Classification
The lease does not transfer ownership, contains no purchase option, does not cover the major part of the trucks' economic life of about ten years and the present value of payments is well below substantially all of the trucks' fair value, since the payments include drivers and services, and the trucks are not so specialized that the lessor could not use them after rebranding. The lease is an operating lease. The group recognizes a single straight-line lease cost of $264,000 a year.
Effect on the Group's Statements and Covenants
The new liability raises the group's total liabilities by about 4%. Its bank covenant measures funded debt to EBITDA and, under the loan agreement, excludes operating lease liabilities, so the covenant is unaffected. Lease cost is presented in operating expenses, as the delivery cost was expected to be, so reported operating income does not change. The main differences for readers are on the balance sheet and in the notes. The group's lender and its auditors were informed of the conclusion before the quarterly statements were issued.
Other Contracts to Review
The same analysis should be applied to similar agreements. The group also buys linen service, in which a supplier delivers and collects towels and uniforms using its own trucks for many customers, and a produce distributor delivers on shared routes. Neither involves an identified asset the group controls, so neither contains a lease, but the memo recommends a contract review checklist for new service agreements so embedded leases are found at signing rather than at year end.
Alternative View
Management initially viewed the agreement as a service contract, because the logistics company operates the trucks. That view would leave about $1.1 million of obligations off the balance sheet. The guidance looks past who operates the asset to who directs its use. Imhoff et al. (1991) showed that putting operating leases on the balance sheet materially changed debt ratios and returns for many companies, the concern that led to the current standard. Treating the agreement as a service would understate the group's obligations and depart from the guidance.
Conclusion and Entries
The agreement contains an operating lease. At commencement, the group debits a right-of-use asset and credits a lease liability for about $1,124,000. Each month it records lease cost of $22,000, with the liability reduced by the payment less interest at 6.5% and the asset reduced by the difference between lease cost and interest. Fuel charges are expensed as incurred.
Draft Disclosure
The group leases delivery vehicles under an agreement that commenced in January with a five-year term. The group elected to combine lease and nonlease components for vehicles. Operating lease cost was $264,000, variable lease cost for fuel was reported separately and the lease liability was measured using an incremental borrowing rate of 6.5%. The note will include a maturity analysis of undiscounted payments and a reconciliation to the recorded liability.
References
Financial Accounting Standards Board. (2016). Leases (Topic 842) (Accounting Standards Update No. 2016-02).
Financial Accounting Standards Board. (2018). Leases (Topic 842): Targeted improvements (Accounting Standards Update No. 2018-11).
Imhoff, E. A., Jr., Lipe, R. C., & Wright, D. W. (1991). Operating leases: Impact of constructive capitalization. Accounting Horizons, 5(1), 51-63.
What the ACC 497 Week 5 instructions ask
ACC 497 Week 5 typically requires a comprehensive research memo on a complex accounting issue. Common requirements include a statement of facts and issues, identification of all relevant Codification guidance and any related updates, analysis that applies the guidance step by step, consideration of alternatives and their consequences, a clear conclusion with journal entries or measurements and a draft disclosure. The memo should read as work product a technical accounting group or auditor would accept, with precise paragraph citations, and may include research on how the issue affects financial statements and users. APA references are expected for standards and research.
How this ACC 497 Week 5 example is built
Embedded leases are a frequent source of error because they sit inside contracts labeled as services. The memo applies the lease definition in order: whether there is an identified asset, whether the supplier has a substantive right to substitute it and whether the customer has the right to direct its use and obtain its benefits. Each test is decided on the contract's terms. The memo then addresses components, since the payments cover drivers and fuel as well as trucks, and explains the practical expedient to combine them. Measurement uses the stated discount rate, classification applies the five criteria and the disclosure draft shows what readers will see. An alternative reading is addressed and rejected with reasons.
ACC 497 Week 5 grading rubric: where the points go
The grading for the comprehensive memo usually rewards completeness, correct application of each step of the guidance, sound treatment of alternatives and a usable conclusion. Faculty check that the identified asset test considers substitution rights, that the right-to-control analysis addresses both economic benefits and the right to direct use, that components are handled under the chosen policy, that the liability and asset are measured at present value with the correct rate and term and that classification is supported. Journal entries and a draft note add value, as does a sentence on covenant effects. Professional memo format and accurate citation of paragraphs and updates complete the grade.
ACC 497 Week 5 help: mistakes to avoid
The biggest risk in ACC 497 Week 5 is concluding too quickly that a service contract has no lease because it is called a service agreement. Apply the definition to the terms. Another error is treating any substitution language as substantive; the supplier must have the practical ability to substitute and benefit economically from doing so. Students also measure the lease using total contract payments without separating nonlease components when they have not elected to combine them. State the policy chosen. Use the rate implicit in the lease if known, otherwise the incremental borrowing rate. Include both the balance sheet effect and the expense pattern. Finally, draft the disclosure, since readers see only what is disclosed, and check it against the ledger entries.
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ACC 497 Week 5 questions, answered
What does ACC/497 Week 5 usually ask for?
It usually asks for a comprehensive research memo on a complex issue, with facts, issues, Codification guidance, analysis, alternatives, a conclusion with entries and a draft disclosure.
Where can I find a free ACC 497 Week 5 sample paper?
The restaurant group memo on this page finds an embedded lease, measures it and drafts the disclosure, with margin notes, free of charge. Share your own comprehensive case and the first memo we write for it is free.
When does a contract contain a lease?
When, for a period and for payment, it gives the customer control over the use of an identified asset, meaning the customer obtains substantially all the economic benefits and directs how and for what purpose the asset is used.
What is a substantive substitution right?
A supplier's right to replace the asset during the term that it can practically exercise and would benefit from economically; if substantive, there is no identified asset.
Can a lessee combine lease and nonlease components?
Yes. A lessee may elect, by class of underlying asset, to account for each lease component and its associated nonlease components as a single lease component.
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