Yacht Inc. (Yacht) is a company based in California that manufactures yachts and
ID: 2582550 • Letter: Y
Question
Yacht Inc. (Yacht) is a company based in California that manufactures yachts and exports the finished yachts to East Asia. Yacht manufactures two models; the most popular model is a 24-foot model (Affordable), and the other is a less common, highly customizable 36-foot model (Luxury). Yacht contracts Evergreen Inc. (Evergreen) to ship its products to East Asia. Evergreen has a fleet of 10 multi-use shipping vessels, each with capacity for 1,000 yachts. The terms of the shipping contracts are as follows: Affordable contract terms: o The term is five years. o MV Ling Beach, a ship in Evergreen’s fleet, is dedicated to shipping Yacht’s Affordables for the term of the contract. o Yacht determines (1) which East Asia ports receive shipments and (2) the order in which deliveries are made to the ports; Yacht instructs Evergreen accordingly. o Yacht has the option to send the ship below capacity. If the ship is below capacity, Evergreen cannot use the excess capacity to ship products of its other customers. Luxury contract terms: o The term is five years. o Evergreen is required to deliver shipments of Luxuries within five weeks of notification from Yacht that an order of Luxuries is ready for shipping. o Evergreen may choose any ship from its fleet to complete the request. o Yacht may provide 250 to 1,000 Luxuries in a single request; however, shipping requests of Luxuries generally do not exceed 500 yachts in a single request because of the lower production volume and longer manufacturing time of Luxuries. o Evergreen has the option to use excess capacity to ship products of its other customers. o After notification from Yacht that Luxuries are ready to ship, Evergreen determines when within the five-week period to ship the cars, as well as the shipping route. Yacht’s CFO understands that the new leasing standard has certain provisions that may affect how the company treats contracts of this nature. Required: Analyze the above and prepare a one-page report (font 12 of Times New Roman; short answers with bullet points are encouraged) addressing the impact (if any) of the new leasing standard on Yacht’s shipping arrangements for the following considerations:
1. Determine whether each of Yacht’s contracts with Evergreen for Affordable and Luxury contains an identified asset. 2. Determine whether each contract conveys the right to control the use of the identified asset to the lessee. 3. At least 3 Relevant ASC Citations ( EX: ASC 842-xx-xx-xx )
Explanation / Answer
Lease is a contract whereby lessee gets substantial right of use and control over asset. In the given scenario both types of YAchts are only being transported through Evergreen's transport media. No right to use or control either type of Yachts has been pass over to Evergreen through out the contract term. Rather Yacht Inc. is directing Evergreen as to where to port ships and the orders in which Yachts are to be delivered. In the case of Luxury Yachts, Evergreen has been just given a right to decide when to take Yachts but that too has to be within five weeks. In both the cases there is clearly no right to either control or use the asset in question viz. Yachts. Hence this cannot be termed as lease contract. Since there is no lease contract, there is no question of identifiable asset.
Considering above, my answer to both the questions is as follows:
(a) Since there is no lease contract, there is no identified asset. Contract is of only transporting consignment to the destined ports.
(b) From the terms of the contract provided, there is no right to control the use of the asset or consignement to the Evergreen. It just has to play the role of transporter.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.