Situation The Cliborn Retail Company negotiated a lease for a retail store in a new shopping center that included 30 stores. The accountant for Cliborn, Gail Naugle, was given the lease agreement to analyze. She looked into whether the lease was a capital lease. The lease did not include a transfer of ownership or an option to purchase. The lease term was for 20 years and the present value of the minimum lease payments was $100,000. Unsure of the fair market value of the property or its life, she called the lessor’s controller.
“That is easy,” he replied. “There is no fair value because we would never sell a single store in a shopping center. And, let’s see, 20 years divided by 75% is about 27 years, so the life of the property must be at least that much. Or do you want a capital lease?”
Directions
Assuming that you are Gail Naugle, research the generally accepted accounting principles and prepare a short memo to the controller of Cliborn that summarizes how to classify the lease. Cite your reference and applicable paragraph numbers.