Chapter 20, Problem 5C

Initial Direct Costs

Efland Company leases equipment to Orange Company. Efland incurred the following costs associated with the lease:

• Advertising to find a lessee—$20,000
• Commissions for the salesperson—$25,000
• Negotiating fees to sign the contract—$10,000
• Payment to an existing lessee to terminate its lease early—$30,000
• General overhead associated with the leased asset—$10,000

Required:

1. 1. Explain what initial direct costs are.
2. 2. Indicate precisely how Efland should account for initial direct costs if this lease is (a) an operating lease, (b) a sales-type lease, and (c) a direct financing lease.
3. 3. Which of the above amounts should Efland consider initial direct costs?