Needslease Case

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Subject : Financial Accounting Ⅱ Lease agreement between NeedsLease and HasSpace

NeedsLease is renting a space for its corporate office from HasSpace by entering into a lease agreement. The agreed lease term is for 10 years and there is no option to renew nor is the ability to negotiate renewal of the term. According to ASC 840 (5F of statement 13), the lease is classified as operating lease. The agreement includes two provisions that may require NeedsLease to perform certain activities at its cost. The first provision requires that the lessee, NeedsLease, may have to perform general repairs and maintenance on the leased premises. The second provision requires that NeedsLease may have to remove all the leasehold improvements and revert the premise back to original condition. How should NeedsLease account for expenditures and depreciation? As stated in ASC 840-10-35-6, leasehold improvements in an operating lease are amortized over the shorter of the useful life of the asset or the required term of the lease periods, taking into consideration of lease periods and renewals. The required term of the lease would be considered to be 10 years since the agreement between HasSpace and NeedsSpace specifically said there was no option to renew the lease at the end of the term. Since the lease term of 10 years is shorter, NeedsSpace’s expenses for the leasehold improvements should be amortized over the 10 years of the lease term. On the date of the agreement| | |

Dr. Leasehold improvements| | |
| Cr. Cash| | | |
| | | | |
Year 2| | | | |
Dr. Lease Rental Expense| | |
| Cr. Cash| | | |
Dr. Leasehold Improvements Amortization Expense|
| Cr. Leasehold Improvements| |
| | | | |
Year 3| | | | |
Dr. Lease Rental Expense| | |
| Cr. Cash| | | |
Dr. Leasehold Improvements Amortization Expense|
| Cr. Leasehold Improvements| |
(The same for year 4 to 10)| | |

How should the NeedsLease...
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