Bear Minimum Essay

The contain of a combustion turbine by regretful Bear Power from colossus Co includes one-third preparations that we must examine to determine whether they should be include in the lower limit lease payment as defined in ASC 840. provision 1This provision involves Big Bear paying $500,000 to its external counsel, and $1 million of legal fees to Goliath Co. The $1 million fee to Goliath Co. should be include in the minimum lease payment. This is supported by 840-10-25-6 which states Fees that are paid by the lessee to the owners of the special-purpose entity for structuring the lease transactionshall be include as part of minimum lease payments. The $500,000 to its external counsel should non be included because it was non an obligatory cost for the lease.Provision 2To determine if the penalty payment from a default would be included in the minimum lease payment, we look at ASC 840-10-25-14 Default covenants related to neglectfulness do not affect lease classification if all of the pursual conditions exist a. The default covenant provision is frequent in funding arrangements. b. The occurrence of the event of default is objectively determinable (for example, subjective acceleration clauses would not satisfy this condition). c. Predefined criteria, related solely to the lessee and its operations, have been established for the ending of the event of default. d. It is reasonable to assume, based on the facts and circumstances that exist at lease inception, that the event of default will not occur. In applying this condition, it is judge that entities would consider novel trends in the lessees operations.If any of those conditions do not exist, then the maximum amount that the lessee could be required to pay under the default covenant shall be included in minimum lease payments for purposes of applying paragraph 840-10-25-1 The first- course of instruction condition about the default covenant provision being customary does exist due to the note stati ng that this is a customary provision inleasing arrangements. The company has positive cash flow and is in compliance with all its debt covenants, which supports Big Bears belief that the opportunity of default is low. Thus conditions 2 and 4 are met. Condition 3, which involves preset criteria in case of a default, does not seem to have been met. Since not all the conditions have been met, the default payment covenant shall be included in the minimum lease payment.Provision 3This provision states that Big Bears rent of $1 million will addition by the same percentage increase in the cost-of-living index. The most recent annual increase in CPI was 4%. 840-10-25-4 states that lease payments that search on an existing index or sate, such as the CPI or prime interest rate, shall be included in minimum lease payments based on the index. Therefore after the first year, the minimum lease payment will rise by $40,000 per year or $3,333.33 per month.