Now Leasing Inc, Term Paper Example

Provision 1: First Lessor requires Now Leasing Inc to pay $50,000 at the beginning of each year for other expenses (e.g, insurance, taxes, maintenance) related to the leased aircrafts.

In this provision, the lease between First Lessor Co and Now Leasing Inc is considered a capital lease defined by ASC 840. When First Lessor Co and Now Leasing Inc. entered into their capital lease contract First Lessor Co obtained Now Leasing Inc.’s debt and other executory costs. According to 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 make in connection with the leased property, excluding both of the following”: (Accounting Research Manager 10)

  1. Contingent Rentals, and
  2. Any guarantee by the lessee of the lessor’s debt and obligation to pay executory costs such as; insurance maintenance and taxes connected to the leased property.

This provision does not constitute being under the minimum lease payments. This provision would be included in the obtained leased agreement and be counted as it a debt that First Lessor obtains when entering into the lease agreement.

Provision 2: Now Leasing Pays Smith & Perry Inc., its external legal counsel, $1 million in connection with negotiating the lease agreement. Now Leasing is also required to pay $2 million of legal fees incurred by First Lessor Co.

In this provision According to ASC 840-10-25-5 lease provision, the payment for legal fees that First Lessor paid to the external company Smith & Perry Inc for legal counsel in negotiating the lease agreement with Now Leasing Inc, would not be included in the minimum lease payment based on being an external party. Upon further analysis of the 840-10-25-6 provision “Fees that are paid by the lessee to the owners of the special purpose entity for structuring the lease transaction, such as fees shall be included as part of minimum lease payments.” (Accounting Research Manager 11) In accordance with the statute the fees paid in connection of negotiating the lease agreement between First Lessor Co and Now Leasing Inc incurred by First Lessor are included in the minimum lease payments.

Based upon these facts presented the legal fees paid to Smith & Perry for their legal counsel from First Lessor Inc are not considered minimum lease payments due to the ASC 840-10-25:

“For a lessee, minimum lease payments comprise the payments that the lessee is obligated to make or can be required to make in connection with the leased property, excluding both of the following”: (Accounting Research Manager 10)

  1. Contingent Rentals, and
  2. Any guarantee by the lessee of the lessor’s debt and obligation to pay executory costs such as; insurance maintenance and taxes connected to the leased property.

The legal fees paid were to the external company Smith & Perry and not to the lessor of the lease.

Provision 3: The lease agreement stipulates that for each calendar year of the term of the lease after 2013, Now Leasing will pay minimum lease in the amount equal to $3 million increased (but not decreased) by the same percentage as the increase in the Consumer Price Index (CPI) from January 1 of the prior year until January 1 of each respective year. The most recent annual increase in CPI as of the inception of the lease was 2%.

According to ASC 840-10-55-39 the Consumer Price Index (CPI) percentage increase is included in the minimum lease payment which stipulates that “This guidance addresses what constitutes minimum lease payments under the minimum-lease-payments criterion in paragraph 840-10-25-1(d) from the perspective of the lessee and the lessor. Lease payments that depend on a factor directly related to the future use of the leased property.”  More specifically in ASC 840-10-55-39, it states that, “lease payments that depend on an existing index or rate, such as the

Prime interest rate, shall be included in minimum lease payments based on the index or rate existing at lease inception.” (Accounting Research Manager 29)

The increase at inception was 2% according to ASC then the 2% increase would be included in the minimum lease payments after 2013 including in the following January. The increases in the payments from the previous year are considered contingent rentals that affects the determination of accruable income. “Minimum lease payments based on the index or rate existing at lease inception; any increases or decreases in lease payments that result from subsequent changes in the index or rate are contingent rentals and thus affect the determination of income as accruable.” (Accounting Research Manager 9) The increase of $60,000= ($3,000,000 x 2%) will be included in Now Leasing Inc.’s annual payments of $3,000,000 over the 12 months at the beginning of each month.

Works Cited

“ASC 840 Leases.” Accounting Research Manager. 2013. Web. 22 July, 2013. http://www.accountingresearchmanager.com.