Introducing Students to the FASB Codification System 163 TheAccounting Educatorsâ Journal, 2011 Case 3 Sublease You are anaudit partner in Slick & Co. CPAs. Mann Co. has been an auditclient for ten years. Mann Company is owned by Lisa Mann who is avery astute businesswoman but she is not at all knowledgeable aboutGAAP. In fact over the years she has complained about the âstupidGAAP rulesâ. Lisa has built Mann into a $100 million in salescompany that went public several years ago. You ran into herwaiting in line at a restaurant and she indicated that she had aproblem you need to address for her. She said: â I know youremember 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 liabilityof about $5 million, as I recall. The lease was an eight-year leaseand we have been depreciating the asset over the lease term. As youknow, our business has been expanding rapidly and the leasedequipment is no longer adequate for our needs. We have decided tobuy or lease new high output equipment. The lease on the originalequipment allows us to sub-lease the equipment, which is our plansince the lease has another four to five years to go. My questionto you is, if we sublease the equipment can we take it and therelated liability off our books? We really need to get that debtoff our books. Perhaps you could tell me how we should structurethe deal so that we can get the liability off the books.â At thispoint Lisa was told that her table was ready so she needed torejoin her party. She said âWould you please write a letter givingyour advice and please give me specific references to GAAP so thatmy controller can review the materials with me. Thanks so much foryour help on this. I really need to join my friendsâ¦.. Try the VealMarsalaâ¦it is great here!â Write a memo to Lisa Mann providing theinformation she requested.
Introducing Students to the FASB Codification System 163 TheAccounting Educatorsâ Journal, 2011 Case 3 Sublease You are anaudit partner in Slick & Co. CPAs. Mann Co. has been an auditclient for ten years. Mann Company is owned by Lisa Mann who is avery astute businesswoman but she is not at all knowledgeable aboutGAAP. In fact over the years she has complained about the âstupidGAAP rulesâ. Lisa has built Mann into a $100 million in salescompany that went public several years ago. You ran into herwaiting in line at a restaurant and she indicated that she had aproblem you need to address for her. She said: â I know youremember 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 liabilityof about $5 million, as I recall. The lease was an eight-year leaseand we have been depreciating the asset over the lease term. As youknow, our business has been expanding rapidly and the leasedequipment is no longer adequate for our needs. We have decided tobuy or lease new high output equipment. The lease on the originalequipment allows us to sub-lease the equipment, which is our plansince the lease has another four to five years to go. My questionto you is, if we sublease the equipment can we take it and therelated liability off our books? We really need to get that debtoff our books. Perhaps you could tell me how we should structurethe deal so that we can get the liability off the books.â At thispoint Lisa was told that her table was ready so she needed torejoin her party. She said âWould you please write a letter givingyour advice and please give me specific references to GAAP so thatmy controller can review the materials with me. Thanks so much foryour help on this. I really need to join my friendsâ¦.. Try the VealMarsalaâ¦it is great here!â Write a memo to Lisa Mann providing theinformation she requested.
