The Bear Minimum

1002 Words Jun 30th, 2011 5 Pages
Statement of Facts
Big Bear Power is a public utility company that leases a combustion turbine from Goliath Co for a 10-year non-cancelable term. The lease agreement is signed on December 15, 2004 and Big Bear’s right to use the turbine begins on January 1, 2005. They have the following three transactions that need to be analyzed under ASC 840, Accounting for Leases, to determine whether costs or potential costs associated with the provision should be included in minimum lease payments: 1. Fees paid in connection with negotiating lease agreement and legal fees. Big Bear pays Stipe, Berry, Mills and Buck LLP, its external legal counsel $500,000 in connection with negotiating the lease agreement and $1,000,000 of legal fees incurred by
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The predefined criteria needed for Big Bear would be the clarification of what a “material adverse change” in their financial statements would entail. However, the loan documents do not clarify this information and thus Big Bear does not meet this condition. iv. The fourth and final condition states, “it is reasonable to assume, based on…that the event of default will not occur. In applying this condition, it is…” (ASC-840-10-25-14-d). Big Bear believes that the likelihood of default is remote.
Big Bear has failed to meet condition number three and therefore the maximum amount that they could be required to pay under the default covenant shall be included in minimum lease payments.

3. Big Bear will pay the minimum lease payments of the $1 million that is increased by the Consumer Price Index of 4%. e. ASC 840-10-25-4 states “lease payments that depend on an existing index or rate, such as the consumer price index or the prime interest rate, shall be included in minimum lease payments based on the index or rate existing at lease inception…” It then goes on to say that any increases in the payments from the previous year are contingent rentals and affects the determination of income accruable. We can conclude that the 4% increase in the Consumer Price Index shall be included. f. ASC 840-10-55-39 provides an example of how the

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