$$I don$$t see that in my intermediate accounting text I saved from college,$$ you explain to another member of the accounting division of Dowell Chemical Corporation. $$This will take some research.$$ Your comments pertain to the appropriate accounting treatment of a proposed sublease of warehouses Dowell has used for product storage.

Dowell leased the warehouses one year ago on December $31.$ The five$-$year lease agreement called for Dowell to make quarterly lease payments of $$2,398,303,$ payable each December $31,$ March $31,$ June $30,$ and September $30,$ with the first payment at the lease$$s beginning. As a finance lease, Dowell had recorded the right$-$of$-$use asset and liability at $$40$ million, the present value of the lease payments at $8\%.$ Dowell records depreciation on a straight$-$line basis at the end of each fiscal year.

Today, Jason True, Dowell$$s controller, explained a proposal to sublease the underused warehouses to American Tankers, Inc. for the remaining four years of the lease term. American Tankers would be substituted as lessee under the original lease agreement. As the new lessee, it would become the primary obligor under the agreement, and Dowell would not be secondarily liable for fulfilling the obligations under the lease agreement. $$Check on how we would need to account for this and get back to me$,$ he had said.

Required:

Access the FASB Accounting Standards Codification at the FASB website. Obtain the relevant authoritative literature on accounting for derecognition of finance leases by lessees. Determine the appropriate accounting treatment for the proposed sublease. What is the specific Codification citation that Dowell would rely on to determine:

if the proposal to sublease will qualify as a termination of a finance lease, and

the appropriate accounting treatment for the sublease?

What, if any, journal entry would Dowell record in connection with the sublease? Provide the specific Codification citation to support your entry.

Answer rating: 100% (QA)

In the scenario provided Dowell Chemical Corporation is considering subleasing underutilized warehou... View the full answer