05 Jun Question Now Leasing Inc, a worldwide airfreight service company based in US, has entered into a lease agreement with First Lessor Co., to lease three cargo airpl
Question
Now Leasing Inc, a worldwide airfreight service company based in US, has entered into a lease agreement with First Lessor Co., to lease three cargo airplanes for a 20-year non-cancelable lease. The lease is classified as a capital lease in accordance with ASC 840, Leases. Annual lease payments shall be $3 million per year, payable at the beginning of each year. The lease agreement is signed on December 1, 2012 and Now Leasing’s right to use the aircrafts begins on January 1, 2013.
Various provisions and other facts from the lease are listed below:
1. First Lessor requires Now Leasing to pay $50,000 at the beginning of each year
for other expenses (e.g., insurance, taxes, maintenance) related to the leased
aircrafts.
2. Now Leasing pays Smith & Perry Inc., its external legal counsel, $1 million in
connection with negotiating the lease agreement. Now Leasing is also required
to pay $2 million of legal fees incurred by First Lessor Co.
3. The lease agreement stipulates that for each calendar year of the term of the
lease after 2013, Now Leasing will pay minimum lease in an amount equal to
$3 million increased (but not decreased) by the same percentage as the increase
in the Consumer Price Index (CPI) from January 1 of the prior year until January
1 of each respective year. The most recent annual increase in CPI as of the
inception of the lease was 2%.
Required:
For each provision presented, evaluate whether the costs or potential costs
associated with the provision should be included in “minimum lease payments,” as defined inASC 840, Lease
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