Question

agreement called fo...

Dowell leased the warehouses one year ago on December 31. The five-year lease agreement called for Dowell to make quarterly lease payments of $2,398,303, payable each December 31, March 31, June 30, and September 30, with the first payment at the lease’s beginning. As a finance lease, Dowell had recorded the right-of-use asset and liability at $40 million, the present value of the lease payments at 8%. Dowell records depreciation on a straight-line basis at the end of each fiscal year.
Today, Jason True, Dowell’s controller, explained a proposal to sublease the underused warehouses to American Tankers, Inc. for the remaining four years of the lease term. American Tankers would be substituted as lessee under the original lease agreement. As the new lessee, it would become the primary obligor under the agreement, and Dowell would not be secondarily liable for fulfilling the obligations under the lease agreement. “Check on how we would need to account for this and get back to me,” he had said.
need to use the FASB’s Codification Research System to obtain the relevant authoritative literature and explain the specific Codification citation that Dowell would rely on.
1)determine whether the proposal to sublease will qualify as a termination of a finance lease.
Keywords:

Codification Reference(s):

2)What’s the appropriate accounting treatment for the sublease?
Keywords:

Codification Reference(s):

can you please just put the keywords use to find the answer and the codification.

Answer 1

Refer ASC 842

If the nature of a sublease is such that the original lessee is relieved of the primary obligation under the original lease, the transaction shall be considered a termination of the original lease. … Any consideration paid or received upon termination that was not already included in the lease payments (for example, a termination payment that was not included in the lease payments based on the lease term) shall be included in the determination of profit or loss to be recognized in accordance with paragraph 842-20-40-1.

If a sublease is a termination of the original lease and the original lessee is secondarily liable, the guarantee obligation shall be recognized by the lessee in accordance with paragraph 405-20-40-2 ( not applicable in this case)

American Tankers would be substituted as lessee under the original lease agreement. As the new lessee, since Americon Tanker would become the primary obligor under the agreement, and Dowell would not be secondarily liable for fulfilling the obligations under the lease agreement.

Considering above the proposal to sublease will qualify as a termination of a finance lease.

Accounting Treatments

When a lease is terminated in its entirety, there should be no remaining lease liability or right-of-use asset. Any difference between the carrying amounts of the right-of-use asset and the lease liability should be recorded in the income statement as a gain or loss; if a termination penalty is paid, that amount should be included in the gain or loss on termination.

Account Name	Debit	Credit
Lease Liability A/c Dr.	$3,32,14,730
To Right to use of assets A/c		$3,20,00,000
To profit and loss A/c		$12,14,730
( To record termination of Finance Lease)

Note- Lease liability balance at year end 1 calculated as total of present value of remaining lease payments of 4 years @8%.