Actg 352 Case

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On December 15, 2010, Big Bear Power entered into a lease agreement with Goliath Co. for a combustion turbine. In order for Big Bear to properly account for the transaction, the terms and provisions of the lease agreement must be evaluated and important decisions must be made. My discussion to follow will be presented in three parts. Part one will present the evaluations that must be made by Big Bear in terms of accounting for the lease. Part two will present the lease details and provisions of the lease and the options Big Bear will have in accounting for them. Finally, part three will present my recommendation for how to account for the lease transaction. Part One – Decisions

The initial evaluation Big Bear must make is in determining the type of lease the transaction will be recorded as. It can be recorded as an “operating lease” or a “capital lease.” An operating lease would be comparable to a rental agreement while a capital lease is essentially an installment purchase. ASC 840-10-25-1 outlines the four criteria that must be considered in determining which type to choose. Brief descriptions of the criteria are listed below and only one must be met for the lease to be recorded as a capital lease. If none are met, it will be an operating lease. 1) Transfer of ownership. The lease transfers ownership of the property to the lessee by the end of the lease term. 2) Bargain purchase option. The lease contains a bargain purchase option. 3) Lease term. The lease term is equal to 75 percent or more of the expected economic life of the asset. 4) Minimum lease payments. The present value at the beginning of the lease term of the minimum lease payments is equal to or greater than 90% of the fair value of the asset. Note: If the first three criteria are not met, further analysis of the lease details and provisions will need to be made to answer the 4th criteria. Computing the minimum lease payment will
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