Case Study ABC Inc Essay
Date: January 11th, 2015
Reviewed by: Professor
ISSUE: Accounting for ABC’s tenant improvements and lease incentive obligations under the lease agreement with Landlord LLC (the “Landlord”).
BRIEF BACKGROUND OF COMPANY
ABC Inc. was founded in 2007 and is headquartered in San Francisco. Revenues and net income for 2010 are $500 million and $80 million, respectively. In September 2010, ABC Inc. (“ABC” or the “Company”) entered into an agreement with Landlord LLC (the “Landlord”) to lease approximately 268,000 square feet or 40% of a building located at 100 Smith Street, San Francisco. The building was originally configured to be used as office space. However, ABC wished to re-configure the interior layout …show more content…
Refer to FAS no. 05-6(Determining the Amortization Period for Leasehold Improvements)
Refer to FAS no. 13 (Accounting for Leases)
Refer to FAS no. 91 (Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases)
Refer to ASC 840-20-25-01 (Overall Guidance on Recognition of Leases) ASC 840-20-55-01(Examples of Estimated Loss on Assumption of a Preexisting Lease)
Refer to ASC 840-40-55-09 ASC 840-40-55-09-h (Amounts Included in the Maximum Guarantee Test)
Refer to ASC 970-340-25-16 (Costs Incurred to Rent Real Estate Projects)
Refer to ASC 970-720-25-1 (Preacquisition Costs)
DETAILED DISCUSSION, ANALYSIS, EVALUATION OF ALTERNATIVES & REASONS FOR CONCLUSION
What type of arrangement is between ABC and the Landlord?
The arrangement between ABC and the Landlord is classified as an operating lease based on the criteria ASC 840-20-25-1. The agreement fails to meet any one of the 4 criteria that determine the classification of a capital lease. In an operating lease, the Landlord transfers only the right to use the property to ABC. At the end of the lease period, ABC returns the property to the Landlord. Since ABC does not assume the risk of ownership, the lease expense is treated as an operating expense in the