Question

Louisiana Company began an operating lease arrangement with Delaware Industries, which was slated to begin on January 1, at monthly lease payments of $10,000. However, Delaware’s negligence prevented Louisiana from moving in on time—since it failed to clean up the place adequately enough to earn a Certificate of Occupancy from the township. Thus, on January 1, Louisiana spent $5,000 for leasehold improvements, which enabled them to obtain the needed Certificate of Occupancy on April 1. In any event, Louisiana paid Delaware all the required $30,000 lease payments and has decided not to pursue legal action for the “un-ready” building. However, can Louisiana defer the $30,000 January-March lease payments over the remaining 33 months of the lease contract?

Please create a written report.  

The written report should be organized in the following order:

Section I: Detailed Discussion and Analysis of Case Facts

Section II : Research results

Section III: Recommendation to Client

Section IV: Attached Resources

Answer 1

1)Case:First step in solving this case is to identify the actual problems. The main problem that is identified from the case is “Whether a lessee can defer particular portions of any payment related to operating lease for those conditions which are beyond its control?” In other words, the operating lease periods must begin only when payments are being made or whenever the lessee is taking the asset’s operating control.

2)Research:

In order to solve this case, terms like operating lease, capitalization of interest, other costs and leasehold improvement must be clearly understood.
ASC 840-20-25-2 deals with certain operating lease agreements which specify about the rent schedule increases over the period of lease term may be for instance, for inducing the rent holiday for lessee, to make a reflection of anticipated effects of inflation and so on. In other words, it mentions that the lessees must consider the inducement of rent holidays to be a part of the operating lease. ASC 840-20-25-3 clearly mentions that “Physical period” for which the rental property is available for the use to the lessee is considered to be a better indicator for the amortization of rental contract rather than any of the payment periods.
According to ASC 840-30-25-3 lessees must be in a position to account for the increase in schedule rate over the period of time, that the lessee will be in a position to take possession or have any control over the property.
Next is the FASB ASC 835-20-15-2 is considering the time that is needed for getting the property to get ready for the intended use as the primary criteria in order to ascertain the period of capitalization. Similarly, FASB ASC 835-20-15-5 can also be referred to as this provides for information related to the assets whose interest can be capitalized in elaborate.

Section 3)Reccomendation:From the above analysis it is clear that Leila must amortize the amount of $30,000 over the remaining 33 months of the lease contract.

Section 4)Attached resources:Assurance accounting standards