...IntroductionASC 840, Leases and FASB Statement No. 13, Accounting for Leases covers the standards of financial accounting and reporting for leases by lessee and lessor. A lease is a contract in which the lessor gives the lessee the right to use an asset (property, plant and equipment) for a specified period of time in exchange for periodic rental payments. The lessor is the owner of the property and the lessee is a tenant or renter. Most frequent examples of assets acquired by lease include automobiles, building space, computers and equipment.NeedsSpace entered into a lease agreement with WeHaveIt to rent space for its corporate offices. The lease is classified as an Operating Lease in accordance with ASC 840, Leases and FASB Statement No. 13, Accounting for Leases. What is an Operating Lease? An Operating Lease is when the lessor gives the lessee the right to use leased property for a limited period of time but retain all the risks and the rewards of ownership. The lease also has a 10 year lease term and there is no option to renew nor is the ability to negotiate for the renewal provided in the lease agreement. Lease term defined in FASB 13 states:“The fixed non-cancelable term of the lease plus all periods, if any, covered by bargainrenewal options, all periods, if any, for which failure to renew the lease imposes a penalty on the lessee in an amount such that renewal appears, at the inception of the lease, to be reasonably assured, all periods, if any, covered by ordinary renewal...
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...ABC Lease Case ISSUE: Based on the ASC48,the agreement between ABC Inc. and Landlord LLC is operating lease. The cost of tenant improvements construction is treat as rental expense. BRIEF BACKGROUND OF COMPANY * ABC Inc. entered into an agreement with Landlord LLC to lease 40% of a building located in San Francisco. In addition, ABC Inc. wanted to make a improvements to the lease building to meet ABC's design specifications. The tenant improvements are for general purpose, but structural. The total estimated budget for tenant improvements is about $37 million * ABC and Landlord made a "work letter" show the details of the tenant improvements construction: * The lease start at 09/30/2010. The original lease term extends for 7 years from the inception date. In addition, the lease contains two 5-year renewal options, the first at 95% of fair value at the time of renewal. * The estimated budget for the TIs specified by ABC is approximately $37 million. The Landlord agreed to fund up to a total of $13 million for the TI construction as a tenant incentive. * The Landlord is overseeing the construction and directly pay all of the TI costs and will also invoice ABC for any amount over their agreed upon contribution amount. * Based on ABC’s design specification and agreed to deliver the facility in two phases, the first of which is targeted to be completed by Q3 2011 for approximately 250,000 square feet, and the second of which is targeted...
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...Build-A-Bear Case – Lease a. Companies lease assets rather than by them because the company might need the asset for only a short period of time. The company might also not want to report an asset or liability or the company simply might not have enough cash to buy the asset. In addition, the company also might have difficulty getting a loan to finance the purchase. b. An operating lease is very similar to a rental agreement. The company does not have ownership of the asset and all the risk and benefits of ownership stay with the lessor. The lessor only transfers the right to use the asset. A lease is considered a capital lease if it meets the following rules: 1) lease life must be greater than 75% of the life of the asset 2) transfer of ownership at the end of the lease term 3) bargain purchase at end of lease term 4) present value of minimum lease payments exceeds 90% of the FMV of the asset A direct financing lease is is defined as a lease where the present value of the lease payments is equal to the cost of the asset. The lessor does not report a gain/loss at the beginning of the lease, but earns interest revenues. A sales type lease is a lease where the present value of the lease payments is greater than the cost of the asset. The lessor records a profit at the beginning of the lease and also earns interest revenue. c. As discussed above, all leases are not the same. Hence, the need to distinguish between different types of leases. Under...
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...Case 49 #4: The Concerns of Sarah Issue: Sarah rented a house from Franks. Every time it rains, the roof leaks, causing plaster to fall from the upstairs bedroom ceilings. One ceiling is beginning to sag. Sarah has complained about the roof leaks to Franks and Franks told Sarah he has caulked the roof, however the roof still leaks. Sarah feels it is Franks’ responsibility to repair the roof; Franks believes since Sarah has sole control of the leased premises, she has the duty to repair the roof. Legal Application: Constructive eviction, maintaining the premises, implied warranty of habitability, and application of the warranty. Resolution: There are four remedies available to Sarah. Sarah can withhold rental payments, repair the property herself and deduct that amount from her rent (provided that doing so is in conformity with state and local laws), cancel the lease, or sue for damages. Additionally, Franks would be liable for any injuries caused from defects on the property. Case 49 #5a: Lease Assignment Issue: I am a college student and plan to attend classes for nine months. I signed a twelve-month apartment lease and paid a $150 security deposit. School is now over for the year and I have a summer job back home. I want to assign the balance of my lease, which is three months, to a fellow student who is going to attend summer school. Legal Application: It depends on what the original lease states; does it allow for a sublease or assignment? In any event...
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...CASE QUESTIONS: Roger Haskett, p. 73 1. What are the goals of the purchasing department? The purchasing department is held accountable for the acquiring of the total amount of all goods and services for the university. The following items are outside of the purchasing powers will to control. The first of these items would be a construction contract. This would pertain to a legal type of document that would consist of cretin details of a building and or demolition project. This contract would most likely consist of three basic factors. This factors would include a license number, a statement of the expected work outcome or quality accompanied by specification modifications, an outline for the overall project; “any allowances; a contraction timetable, including starting ad completion dates; a fixed price for the work, or a time-and-materials formula; a payment schedule; a written warranty; and a clause that outlines the methods for resolving ay disputes that arise.” (InterNACHI)[1]. Another item that would be considered outside of the purchasing departments will to control would be reading materials offered by the library system. This would include anything electronically and or physically provided by the library. With this, they purchasing department will also not involve themselves in the items offered for resale by the campus bookstore. This would include any and all current materials that could be rented by or re-purchased back by the bookstore to be reusable toward...
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...Magnet Beauty leases all of its stores from the same lessor. They have determined that leasing makes more sense than buying properties. Describe the process that most companies undertake to make lease-versus-buy decisions. A company attempting to differentiate and decide between lease-versus-buy should first consider how long it plans to have the facility. This is an important point/factor when deciding between the two options because a company may opt to lease a facility, for instance, for a short time if the company is aware that it will move to a new location in the near future whereas a company will be more likely to purchase if the company knows that it will continue business in that location in the future. Another important factor is whether or not the company wishes to own the asset or simply use it for a certain period of time without being responsible for upkeep of the asset. We will see later that there is a distinction between capital and operating leases that touches on this concept. However, with purchasing of the asset there is no option of full ownership; as soon as you buy it you own. A company will also reflect on the concept of tax. If the asset is worth a lot of money then acquisition of this asset will have ramifications on taxable income. If you purchase the asset for instance then there will be less cash in the business therefore less taxable income at the end of the year whereas on the other hand if the asset is leased on an operating lease basis then the...
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...ACCT2241 – Introductory Financial Accounting - Fall 2011 Assignment #8 (due Saturday, November 19, 2011 at 10:00PM) Instructions: 1. Your assignment must be completed in Word or Excel and saved using the filename: yourlastnamefirstinitial_HW8 (i.e., SmithJ_HW8) 2. This is an individual assignment. While you may discuss concepts from this assignment with your classmates, please remember that it is expected that the assignment will be completed and submitted on an individual basis. 3. Assignment must be submitted via Blackboard. Late submissions will NOT be accepted. Question 1: On May 1, 2011, XYZ Corp. borrows $50,000 from its bank and signs a promissory note to repay it in 18 months at the interest of 9% per annum. Although no principal payments are to be made until the note matures in 18 months, the interest on the note is to be paid every 6 months. The company’s fiscal year end is December 31. Required: (1) Prepare the journal entries that would be made during 2011 to record the issuance of the note and the first interest payment. Please indicate dates for each journal entry. (2) Would an adjusting entry related to this note be required on December 31, 2011? If so, prepare a journal entry. (3) How much interest expense would be reported on the XYZ Corp’s income statement for the year ended December 31, 2011? (4) What liabilities would be reported on the XYZ Corp’s December 31, 2011, balance sheet related to this loan? Please specify the...
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...Income Taxes We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the respective tax bases of our assets and liabilities. Deferred tax assets and liabilities are measured using current enacted tax rates expected to apply to taxable income in the years in which we expect the temporary differences to reverse. We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available evidence, we determine that some portion of the tax benefit will not be realized. In addition, our income tax returns are periodically audited by domestic and foreign tax authorities. These audits include questions regarding our tax filing positions, including the timing and amount of deductions taken and the allocation of income among various tax jurisdictions. We evaluate our exposures associated with our various tax filing positions; we recognize a tax benefit only if it is more likely than not that the tax position will be sustained on examination by the relevant taxing authorities, based on the technical merits of our position. For uncertain tax positions that do not meet this threshold, we record a related liability. We adjust our unrecognized tax benefits liability and income tax expense in the period in which the uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the...
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...Case 9-4 How should NeedsSpace account for the two obligations noted as provisions in the lease agreement? ● Provision 1: “Lessor may require the lessee to perform general repairs and maintenance on the leased premises.” By entering the lease agreement, NeedsSpace (the lessee) becomes legally and contractually responsible for performing general repair and maintenance on the leased premises. Assuming that the lessee is required to make deposits to financially protect the lessor concerning the maintenance obligation by setting up a reserve, the guidance in ASC 840-10-05-9A through 840-10-05-9C states that the maintenance reserve shall be recognized as a deposit asset and reimbursed later when the required repair and maintenance is completed by the lessee. However, the provision in the lease agreement does not call upon the lessee to make deposits but simply requires the lessee to perform repair and maintenance on the leased premises. Alternative 1: Accrual Method Since there is a contractual liability for the lessee to perform general repair and maintenance, the maintenance requirement provision may be assumed as a present economic obligation, not just a future commitment. If the fair value estimate of future maintenance expense can be measured with sufficient reliability, the provision may lead to recognition of an accrued liability for the repair and maintenance performance obligation at the inception of the lease. The accrued liability for the repair and maintenance...
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...Sable sells and leases equipment to its customers. * Sable entered into a contract with Buildit Co. leasing a bulldozer for construction. * The lease term is 10 years and the economic and useful life of the bulldozer is 15 years. * Annual lease payments due at the end of every year will be $16,000. * Buildit is responsible for maintenance, insurance, and tax payments arising from the lease. * The residual value of the bulldozer at the end of the lease term is estimated at $24,000, although no guarantee of the residual value. * Lease does not transfer ownership of the asset at the end of the lease. * The bulldozer cost Sable $100,000 to manufacture and sells for $135,000. * Sable has recently been selling the bulldozer for $125,000 because of economic situations. * Implicit rate on $135,000 fair value is 5.45%. * Implicit rate on $125,000 fair value is 6.93%. * Payments are expected to be collected when due. Identification of Issues and Alternatives: The major question at hand in this case is whether or not the lease should be classified as a sales-type lease, a direct financing lease, a leveraged lease, or an operating lease. If the lease meets any of the criteria for being a capital lease and meets the extra required criteria for each classification then it is one of the first three, and if not then it is an operating lease. The determination of the type of lease will affect how the lease is classified on...
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...Benefits of a Capital Lease December 3, 2012 MEMORANDUM TO: Trucking Company, Inc. FROM: Accountant DATE: December 3rd, 2012 SUBJECT: Benefits of a Capital Lease CC: John Smith, Supervisor In response to your request for more information on the topic of leases, I will explain the different aspects of leases to help you get a better understanding of the topic so that you may make an informed decision on which type of lease is best for your company. Capital Leases A capital lease emulates an installment purchase of an asset. This type of lease transfers the benefits and risks associated with ownership of an asset to the lessee (Schroeder, Clark, & Cathey, 2011). According to ASC 840-10-25 (FASB, 2009) (IAS 17), a lease must meet at least one of the following four criteria to be considered a capital lease: a. Ownership is transferred by the end of the lease agreement. b. There is a chance to purchase at a bargain price. c. The length of the lease is 75% or more of the assets life. d. The sum of the minimum payments, calculated at present value, exceed 90% of the assets fair value. Criteria c and d do not apply if the term of the lease begins in the final 25% of the assets useful life. Two Types of Capital Leases There are two types of capital leases concerning the lessor; direct financing and sales-type leases. For a capital lease to be considered a direct financing or sales-type lease, according to ASC 840-10-25 (FASB, 2009), both of the following...
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...EQUIPMENT TERM LEASE AGREEMENT Between Non-Linear Pro, hereinafter called Lessor and Quick Take Video, hereinafter called Lessee This Lease Agreement between Lessor and Lessee dated March 23, 2012 contains the following terms: 1. Objective Lessor hereby leases to Lessee and Lessee hereby leases from Lessor, all equipment for video editing system and services (including training, and resources to provide services that come along with the editing system). 2. Leased Equipment All Equipment shall be leased for the purpose of video editing and services that provide training to the employee of the Lessee. Leased hereunder is as outlined below: Description Quantity ----------- -------- Non-Linear Pro Editing System 1 3. Term of Lease (1) The date of the Lessee's signing the Lease Agreement. The term of this Lease with respect to each item of Equipment shall commence when the signed by Lessee, and the expiration date of this agreement is April 23, 2012. In case of the revocation of this leasing contract by the agreement of both parties, lessee has an option to extended the lease agreement or to purchase the equipment. The purchasing price of the foresaid equipment shall be the amount equal to the original equipment cost less accumulated depreciation cost as of purchasing date. Any right, title and interest pertain to this Leased Equipment shall transfer to Lessee at the...
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...Restructuring Debt Data ACC 545 July 18, 2011 Restructuring Debt Data Understanding the reporting and disclosure requirements for the different types of debt regarding debt restructuring is imperative. The manager of this company has requested an explanation of the above regarding bonds payable, notes payable, and capital leases. This paper should satisfy any questions about these topics. Long-Term Liabilities Included are several types of long-term liabilities; bonds payable, notes payable, and capital leases. Each of these types of debts have some similarities and some differences regarding the reporting and disclosure requirements, so to better understand those requirements and ensure proper application of requirements, an explanation is given. Loan covenants or restrictions usually come with long-term debt to protect both lenders and borrowers (Kieso, Weygandt, and Warfield, 2007). The information included in the loan covenant is the amount authorized to be issued, interest rate, due dates, call provisions, property pledged as security, sinking fund requirements, working capital, or any other restrictions. All of this information should be included in the body of the financial statements or the notes for a complete understanding of the financial position of the company (Kieso, et al., 2007). Bonds Payable Companies should report long-term bond liabilities at their amortized value. If a bond issues at a premium, the total bond liability reported at the end of...
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...The University of Oregon “The Bear Minimum” Case ACTG 352: Intermediate Accounting III October 9th, 2014 To: Big Bear Power Date: October 7, 2014 Re: The Bear Minimum Summary Big Bear Power, a public utility company, has entered into a 10-year non-cancelable agreement with Goliath Company to lease a turbine. The lease is effective on January 1, 2011. The purpose of this report is to provide Big Bear with insight in evaluating whether the costs or potential costs associated with the lease should be included in the “minimum lease payments” according to US GAAP Accounting Standards Codification. When assessing the minimum lease payments, we reviewed the legal costs incurred to Big Bear’s external legal counsel (Stripe, Berry, Mills, and Buck LLP) pertaining to the negotiation of the lease terms. We also examined the provision requiring Big Bear to pay a penalty if it were to default under its current credit arrangement with its bank, as well as the effect on monthly payments that are subject to an increase in the consumer price index calculation. Provision One First we will review the costs incurred during the negotiating of the lease terms. Big Bear is required to pay its external legal counsel $500,000 in legal costs. This amount should not be included in its minimum monthly payments because per accounting guidance ASC 840-10-25-5: For a lessee, minimum lease payments comprise the payments that the lessee is obligated to make or can be required to...
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...LEASE OR FINANCE?? In today’s competitive economy, a vehicle is no longer considered a luxury anymore, but rather a necessity. There are not very many cities in the U.S. where you can live without car. I live in Orlando, Florida and dependable transportation is a mandatory expense. If you want to buy a new car, the cheapest way to buy a car is to pay cash for it. By paying cash you will avoid any finance charges. However, there are not very many people have thirty to fifty thousand dollars to spend on the vehicle. Lease or finance are two main options if you don’t have a lot of cash available to spend on the car. I have chosen the BMW and Infinity dealership to do my analysis. I picked two similar cars form the both dealerships: X5 xDrive35i Sport Activity from BMW and Infiniti FX50 from Infinity dealership. After analyzing financing and leasing options, there is no clear answer on whether to finance or lease a vehicle. It basically all depends on how much money you have, how many miles you drive, how long you want to keep your car for and etc. BMW offers 0.9% APR for 24 month and 3.9% for 25-60 month with $0 down payment to finance the X5 xDrive35i Sport Activity. The price of the vehicle is $57,700. It’s approximately $1,700 per month for 36 months. The lease option is $699 per month for 36 months with $3,000 down payment, $725 acquisition fee, and $4,424 cash is due at signing. The total lease payment is $25,164. At the end of the lease, lessee will be liable for disposition...
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