Lizbeth Salgado
5-13-2013
Acct-325
Trans-Share Case

1. Should the Fractional Interest Program be accounted for as a lease? Provide support and citation from codification.
The Fractional Interest Program offered by Trans-Share Inc. may be accounted for as an operating (service) lease. The purchase of an undivided one-eighth interest in the aircraft is basically the same as leasing the plane. In the Trans-Share case, customers enter into purchase agreements with the company to lease aircraft for a five year period. Characteristics of a lease can be found in code ASC 840-20-25-1, which indicates that rent shall be charged to expense by the lessee and reported as income by the lessor over the lease term as it becomes receivable. However if collectability of assets received is doubtful, revenue may be recognized as cash is received instead of accruing revenues.
As a lease, the purchase of the fractional interest in the airplane would not imply ownership. It would simply be considered prepaid rent or an advance lease payment. It should therefore be recognized in periodic installments over the period of the lease. This way, if the lessee decides to terminate the contract, it will be easier to calculate how much he is due back and how much of the revenue should be allocated and recognized.
Disclosure is not recognition. Although the sales price of the fractional ownership is disclosed and collected by Trans-Share, operating lease revenue should not be recognized until each rental amount has been accrued. On the other hand, costs related to the leased asset, such as depreciation and executory costs like maintenance, may be expensed as incurred. Accordingly, the lease profits for Trans-Share will equal the difference between the airplane use payments received from the client and the associated depreciation and executory costs incurred by the company. Under