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2 pages/β‰ˆ550 words
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Style:
APA
Subject:
Accounting, Finance, SPSS
Type:
Case Study
Language:
English (U.S.)
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Date:
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Topic:

Lease Identification

Case Study Instructions:

Objective:

This case introduces students to the accounting for leases under ASC 842, specifically with regard to determining whether a contract contains a lease. For an arrangement to be a lease or contain a lease, the contract must (1) contain an identified asset and (2) convey to the customer the right to control the use of the asset.

Instructions:

Consider multiple alternatives to the issues in the scenario presented below.  Then, using the IFRAC method prepare a solution to the case.  The solution should be presented using a “memo to file” format.  Use the FASB Codification to find and state the appropriate accounting pronouncements.  You may need to visit the FASB website to access the Concept Statements where appropriate.  Be sure to copy and paste the exact content/code as the rule.  Then apply the rules to the facts of the case choosing the best course of action.  You may have a conclusion for each case issue 

Facts:

Best Cars Inc. (Best Cars) is a company based in New York that manufactures automobiles and exports the finished vehicles to Europe. Best Cars manufactures two models; the most popular model is a four-door sedan (Sedan), and the other is a less common, highly customizable luxury sports car (Luxury Car). Best Cars contracts Trans-Atlantic Inc. (Atlantic) to ship its products to Europe. Atlantic has a fleet of 10 multi-use shipping vessels, each with capacity for 2,000 vehicles 

The terms of the shipping contracts are as follows:

  • Sedan contract terms:
    • The term is five years.
    • MV Manhattan, a ship in Atlantic’s fleet, is dedicated to shipping Best Car’s Sedans for the term of the contract.
    • Best Cars determines (1) which European ports receive shipments and (2) the order in which deliveries are made to the ports; Best Cars instructs Atlantic accordingly.
    • Best Cars has the option to send the ship below capacity. If the ship is below capacity, Atlantic cannot use the excess capacity to ship products of its other customers.
  • Luxury Car contract terms:
    • The term is five years.
    • Atlantic is required to deliver shipments of Luxury Cars within five weeks of notification from Best Cars that an order of Luxury Cars is ready for shipping.
    • Atlantic may choose any ship from its fleet to complete the request.
    • Best Cars may provide 250 to 2,000 Luxury Cars in a single request; however, shipping requests of Luxury Car generally do not exceed 500 vehicles in a single request because of the lower production volume and longer manufacturing time of Luxury Car.
    • Atlantic has the option to use excess capacity to ship products of its other customers.
    • After notification from Best Cars that Luxury Cars are ready to ship, Atlantic determines when within the five-week period to ship the cars, as well as the shipping route 

Best Car’s CFO understands that the new leasing standard has certain provisions that may affect how the company treats contracts of this nature.

Issues:

Analyze the above and prepare a memorandum addressing the impact (if any) of the new

leasing standard on Best Car’s shipping arrangements for the following considerations:

  1. Determine whether each of Best Car’s contracts with Atlantic for Sedan and Luxury Car contains an identified asset.
  2. Determine whether each contract conveys the right to control the use of the identified asset to the lessee.
Case Study Sample Content Preview:
Answer: The main issues in this care are (1) whether there is a contained identified asset in any of Best Car's contracts with Atlantic for Sedan and Luxury Car, and (2) if there are any provisions in such contracts stating the right to control the use of the identified asset to the lessee. A lease contract is defined under ASC 842-10-15-3 as "the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for some time in exchange for consideration." From these, a determination of the critical issues could be made. First Issue - Sedan Contract Auto's sedan contract with Atlantic specifies that there is a recognized asset, according to Rule ASC 842-10-15-4. Auto's sedans will only be transported aboard the MV Manhattan for the duration of the contract. The contract details the conditions under which the motor vehicle decides how shipments are received at European ports and the sequence in which deliveries are made to the ports. The contract vehicle can get nearly all financial benefits from using the MV Manhattan. Additionally, the ship is allocated to Auto's cargo throughout the contract. Motor vehicles also can send the ship at a lower capacity, demonstrating that it has substantial economic advantages. Additionally, a motor vehicle has the authority to regulate the use of Manhattan MV. The vehicle decides which ports in Europe will receive supplies and informs the Atlantic of the sequence in which they require the deliveries. Finally, the leases, as mentioned in the Sedan Contract, tend to fall under the purview of principle 842 of the principle codification, which we frequently use pertains to the following under Auto's agreement with Atlantic: Second Issue - Excerpt from ASC Lease The ASC provides certain exceptions under 842-10-15-20 wherein a customer has the right to direct the use of an identifiable asset during the...
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