Case: Maples and Trumpet   Term Paper ID:37866 Click to get this paper

Essay Subject: Case study that addresses a 99-year lease with improvements. Includes references.... More...

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Paper Abstract: The paper examines a case study that addresses a 99-year lease with improvements. Includes references. Paper Introduction: Case Maples and Trumpet Current situation Maples Model Development has entered into a year ground lease withDon Trumpet The rent is subject to increase every ten years with theincrease based on the Consumer Price Index Increases will range between and percent for the ten-year period There is a cancellation penaltyif Maples Model cancels the lease prior to its expiration In that event title to the building that Maples Model has built and any related leaseholdimprovements will pass to Trumpet There is no Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. The lease term is 99 years. With therecent accounting scandals that have included off-balance sheetliabilities, this practice has come under increased scrutiny, but remainsin practice so long as companies abide by the FASB definition of capitaland operating leases. This results in what some analystsconsider to be an understatement of the company's liabilities-off-balancesheet financing-since the company is actually liable for the stream of rentpayments due over the life of the lease (Belverd, et al, 2 ). Certainly astraight-line 4 -year depreciation strategy could be employed. The building, or leasehold improvement, has no connection to Trumpet,nor will it unless Maples cancels the lease-even then, there may be ways toavoid transferring title through litigation, particularly if Maples cancelsthe lease due to negligence on the part of Trumpet. The Financial Accounting Standards Board (FASB) has issued astatement that covers leases, Statement of Financial Account Standards No.13, Accounting for Leases. Increases will range between2 and 6 percent for the ten-year period. If the lease iscancelled and Trumpet successfully enforces the provision that requirestransfer of title of the building, Maples would realize the loss in assetsat that time. MaplesModel has built a seven story on the site that has a useful life of 4 years for depreciation purposes. One of the key considerations where leases are concerned is whetherthe lease is a capital lease or an operating lease. 275-287. Accountingpractices do not document what might happen or what may never happen; theydocument the actual events that the company has encountered. Recommendations Maples Model should record rent payments to Trumpet as rent expensesfor the years in which they are incurred. W. These are separate issues from an accountingstandpoint. Issued in 1976, this is a comprehensivestatement that addresses the leasing of equipment and facilities as well asland leases (Monson, 2 1). Capital leases arehandled differently, essentially treating the lease as a sale, and areincluded on the lessee's financial statements in their aggregate value.Operating leases, on the other hand, are treated essentially as rent, andare not included on the financial statements other than as a rental expensefor each period in which rent is paid. Boston: Houghton Mifflin.Monson, D. The rent is subject to increase every ten years, with theincrease based on the Consumer Price Index. Financial and Managerial Accounting. There is no stated provision forconsideration to Maples Model if Trumpet cancels the lease early. Discussion The cancellation clause in the lease agreement does not have anaccounting impact for Maples Model or Trumpet. Leases thatessentially transfer the benefits and risks associated with the property tothe lessee should be considered capital leases and recorded as anobligation by the lessee and a sale by the lessor. (2 1, September). The building should be entered as an asset and depreciated in keepingwith the depreciation strategy that Maples typically uses. There is a cancellation penaltyif Maples Model cancels the lease prior to its expiration. All other leases areconsidered operating leases (Monson, 2 1). Accounting Issues The key accounting issues involved with this case include the groundlease and the building. Under this definition, theground lease in the current case is an operating, not a capital, lease. The company may want to indicatethe next ten years' payments-when increases are received-in its financialstatements. Some companies do include lease liabilities in notesto financial statements in order to provide shareholders with a betterunderstanding of the company's liabilities. In that event,title to the building that Maples Model has built and any related leaseholdimprovements will pass to Trumpet. (2 ). The FASB separates capital and operating leases based on which partymaintains control and risk over the property in question. If Maples cancels the contract and transfers title of the building toTrumpet, the company would record a loss for the remaining book value ofthe building and Trumpet will record an increase in assets. Other contracts into whichMaples Model has entered are also likely to have some type of penaltyissue, but those eventualities only become material from an accountingstandpoint if, in fact, Maples Model cancels the contract. The Conceptual framework and accounting for leases. Accounting Horizons, 15, pp. Case -1 : Maples and Trumpet Current situation Maples Model Development has entered into a 99-year ground lease withDon Trumpet. ReferencesBelverd, E., Jr., et al. 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