Question: Last year, Manabee Inc. leased a computer system from ICS Company for five years. After using the system for only 10 months, Manabee realized that

Last year, Manabee Inc. leased a computer system from ICS Company for five years. After using the system for only 10 months, Manabee realized that it was no longer adequate for its expanding business needs. As a result, Manabee negotiated with ICS to terminate the original lease and enter into a new five-year lease under which ICS would provide Manabee with an expanded, upgraded computer system. ICS would not agree to the arrangement unless Manabee paid a $200,000 lease cancellation fee. Can Manabee deduct this fee as a current expense, or must Manabee capitalize the fee as a leasehold cost and amortize it over the five-year term of the new lease?

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