Technical Case Studies SOLUTIONS

Case: Accounting for Lease Extension
(Revised and updated 5/2013) Jack leases an office building from Jill. The lease is classified as an operating lease under the guidance of ASC Topic 840, Leases. The lease does not include any renewal options upon the expiration, but Jack is in the process of negotiating an extension of the lease. Jack proposes to make a single up-front payment of $1.2 million to Jill in exchange for an extension of the lease at the current rate for another 10 years. The extension would create a new lease under ASC par. 9 of 840-10-35-4. 1. 2. Should Jack include the $1.2 million in the calculation of the minimum lease payments when classifying the new lease? Assuming the new lease
” Furthermore, in accordance with ASC par. 840-20-25-1, “rent [on an operating lease] shall be charged to expense by leasees (reported as income by lessors) over the lease term as it becomes payable (receivable). If rental payments are not made on a straight-line basis, rental expense nevertheless shall be recognized on a straight-line basis unless another systematic and rational basis is more representative of the time pattern in which use benefit is derived from the leased property, in which case that basis shall be used. Therefore, Jack should compute the total amount of rental cash outflows called for during the lease term of ” the new agreement and divide that amount by the 120 months in the lease term to determine the monthly rental expense to be recorded on a straight-line basis.

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Technical Case Studies SOLUTIONS

Case: Classification of cash received from an equity investee
(Revised and updated 5/2013) Company ABC (“ABC”) is an equity investor in 2 joint