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ID: 2335427 • Letter: A
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ation Proje XMacGraw till Education CanConnect Class Firancial A 2/le/content/6632 5 Reasons To Spend Your H+v Ca Carpe N Ei3 Home adineaucdhot.net Home Alde Rnk intenal oeme Sen Yahoo Case 3 Sublease You are an audit partner in Slick & Co. CPAs. Mann Co. has been an audit client for ten years. Mann Company is owned by Lisa Mann who is a very astute businesswoman but she is not at all knowledgeable about GAAP In fact over the years she has complained about the "stupid GAAP rules" Lisa has built Mann into a $100 million in sales company that went public several years ago. You ran into her waiting in line at a restaurant and she indicated that she had a problem you need to address for her. She said: "I know you remember all Remember, we had disagreements on how the lease should be handled. You made us treat it as a purchase and record a related liability of about $5 million, as I recall. The lease was an eight-year lease and we have been depreciating the asset over the lease term. As you know, our business has been expanding rapidly and the leased equipment is no longer adequate for our needs. We have decided to buy or lease new high output equipment. The lease on the original equipment allows us to sub-lease the equipment, which is our plan since the lease has another four to five years to go. My question to you is, if we sublease the equipment can we take it and the related liability off our books? We really need to get that debt off our books. Perhaps you could tell me how we should structure the deal so that we can get the liability off the books. of the equipment we leased about three years ago. At this point Lisa was told that her table was ready so she needed to rejoin her party. She said "Would you please write a letter giving your advice and please give me specific references to GAAP so that my controller can review the materials with me. Thanks so much for your help on this. I really need to join my friends... Try the Veal Marsala...it is great herel" Write a memo to Lisa Mann providing the information she requested. DOLExplanation / Answer
The memo is prepared as below:
To: Lisa Mann
From: XYZ (Audit Partner)
Date: 19/9/2018
Subject: Sublease
_______
This is in response to your request for the treatment of sublease and offloading of lease obligation from your books of accounts. FASB ASC 840-30-40-5 (after doing a research of GAAP) is found to be relevant in the given case.
FASB ASC 840-10-40-2 provides guidance with respect to a lease where the sublease results in termination of original lease. It states that in case of a capital lease of property other than real estate (including integral equipment), the value of leased asset and corresponding liability can be removed from the books on the termination. The original lessee (Mann Co.) will be required to recognize any amount of gain or loss that may occur at the termination of lease. This gain or loss shall include the amount of any consideration received or paid on termination.
FASB ASC 840-30-35-12 provides guidance with respect to a lease where the primary obligation of the original lessee continues to exist after the sublease. In such a case, the original lessee (Mann Co.) will be treated as the sub-lessor of the property and the obligation with respect to the original capital lease will continue to exist in the books of Mann Co. until Mann Co. arranges a new lease agreement between the original lessor and the sub-lessee. In other words, the value of leased asset and the corresponding liability can be removed from the books only if Mann Co. is not a party to the new agreement between the original lessor and the sub-lessee. Mann Co. will again be required to recognize any amount of gain or loss for the difference between the value of leased asset and liability so removed from the books of accounts.
Please feel free to get back to us in case you need any additional information.
Thanks
XYZ (Audit Partner)
Slick and Co. CPAs.
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