You ran into her waiting in line at a restaurant and she indicated that she had a problem you need to address for her. She said: “ I know you remember all of the equipment we leased about three years ago. Remember, we had disagreements on how the lease should be handled. You made us treat it as a purchase and record a related liability of about $5 million, as I recall. The lease was an eight-year lease and we have been depreciating the asset over the lease term. As you know, our business has been expanding rapidly and the leased equipment is no longer adequate for our needs. We have decided to buy or lease new high output equipment. The lease on the original equipment allows us to sub-lease the equipment, which is our plan since the lease has another four to five years to go. My question to you is, if we sublease the equipment can we take it and the related liability off our books? We really need to get that debt off our books. Perhaps you could tell me how we should structure the deal so that we can get the liability off the books.”
At this point Lisa was told that her table was ready so she needed to rejoin her party. She said “Would you please write a letter giving your advice and please give me specific references to GAAP so that my controller can review the materials with me. Thanks so much for your help on this. I really need to join my friends….. Try the Veal Marsala…it is great here!”
Write a memo to Lisa Mann providing the information she requested.
