In: Accounting
Describe the formation of sales and lease contracts.
Please answer by type-in text.
Definition of Sale
A sale “consists in the passing of title from the seller to the buyer for a price.”Uniform Commercial Code, Section 2-106.
Sales are distinguished from gifts, bailments, leases, and secured transactions. Article 2 sales should be distinguished from gifts, bailments, leases, and secured transactions. A gift is the transfer of title without consideration, and a “contract” for a gift of goods is unenforceable under the Uniform Commercial Code (UCC) or otherwise (with some exceptions). A bailment is the transfer of possession but not title or use; parking your car in a commercial garage often creates a bailment with the garage owner. A lease (see the formal definition later in this chapter) is a fixed-term arrangement for possession and use of something—computer equipment, for example—and does not transfer title. In a secured transaction, the owner-debtor gives a security interest in collateral to a creditor that allows the creditor to repossess the collateral if the owner defaults.
Definition of Goods
Even if the transaction is considered a sale, the question still remains whether the contract concerns the sale of goods. Article 2 applies only to goods; sales of real estate and services are governed by non-UCC law. Section 2-105(1) of the UCC defines goods as “all things…which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid.” Money can be considered goods subject to Article 2 if it is the object of the contract—for example, foreign currency.
Definition of Lease
Section 2A-103(j) of the UCC defines a lease as “a transfer of the right to possession and use of goods for a term in return for consideration.” The lessor is the one who transfers the right to possession to the lessee. If Alice rents a party canopy from Equipment Supply, Equipment Supply is the lessor and Alice is the lessee.
Two Types of Leases
The UCC recognizes two kinds of leases: consumer leases and finance leases. A consumer lease is used when a lessor leases goods to “an individual…primarily for personal, family, or household purposes,” where total lease payments are less than $25,000.Uniform Commercial Code, Section 2A-103(e). The UCC grants some special protections to consumer lessees. A finance lease is used when a lessor “acquires the goods or the right to [them]” and leases them to the lessee.Uniform Commercial Code, Section 2A-103(g). The person from whom the lessor acquires the goods is a supplier, and the lessor is simply financing the deal. Jack wants to lease a boom lift (personnel aerial lift, also known as a cherry picker) for a commercial roof renovation. First Bank agrees to buy (or itself lease) the machine from Equipment Supply and in turn lease it to Jack. First Bank is the lessor, Jack is the lessee, and Equipment Supply is the supplier.