Case 13-4 Lease Classification – Nonspecialized Equipment Lease

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Case 13-4 1 Case 13-4:Lease Classification – Non-specialized Equipment Lease Samuel Parsons School of Business, Liberty University Author Note Samuel Parsons I have no known conflict of interest to disclose. Samuel Parsons separsons@gmail.com

Case 13-4 2 With the details given to us in the textbook, the Morgan Corp’s non-specialized lease is with the Hoffman Corp should be categorized as an operational lease. An operational lease is basically a “renter’s agreement between lessor and lessee.” (Schroeder, Clark, and Cathey, 2009) In this scenario, the Hoffman Corp would be the lessor and the Morgan Corp would be the lessee. Now, since this is a non-specialized lease between the two Corps, there is no specific or specialized equipment that is being used for rent. A more general basic equipment supplies, such as office furniture or water coolers, would be considered non-specialized because there is no specific tie in to a specific type of industry. According to authors Pignataro and Columbo, “the impact of the level of information accuracy on the stability of a collusive agreement is non-monotonic.” (Columbo and Pignataro, 2022) Knowing this, it is important to to know how the operational lease is recorded and measured for accurate reporting. The measurement of the operational lease starts at the beginning of the five year lease term and it should be recorded as a liability. If properly valued, the fair market value of the items on the lease should be at full price. If not valued, then it shouldn’t be at full price. However, the items being on leased can’t be purchased, it depends on Morgan Corp to maintain the items while Hoffman Corp doesn’t offer any incentive should an unexpected incident were to occur. The Right-Of-Use (ROU) Asset concept is what the name says. This particular asset gives the lessee of an operational lease to use any leased item within the lease term. According to the FASB, “an entity shall classify each separate lease component at the commencement date.” (ASC, 2022) Meaning, as soon as the lease term begins the right-of-use asset can be recorded as the items are used. As previously mentioned, Morgan Corp is entitled for all equipment maintenance during the lease term and Hoffman Corp offers no incentives should something happened. Morgan Corp is also responsible to make payments during its leasing period and thus having a lease liability during the leasing term.

Case 13-4 3 The passage of Galatians 3:15 would be applicable to this case, which states that “to give a human example, brothers: even with a man-made covenant, no one annuls it or adds to it once it has been ratified.” (ESV) Contracts and agreements are very beneficial in the beginning of an arrangement and both parties of the agreements are honor bound to uphold them. Granted, that circumstances and unforeseen events do arise without warning; but we are obligated to maintain the arrangements made. For if we do not, our integrity and reliability would be questioned. Worsened if we try to change the existing agreements away from the public to entice our greed. At that point, it becomes very hard for anyone to trust one another, even when someone is in their most darkest times. That is why it is always best to be honorable and honest from the beginning to the end, so that when help is needed. It can be given instead of questioned harshly.

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Case 13-4 4 References Galatians 3:15 . Galatians 3:15 ESV - - Bible Gateway. (n.d.-b). https://www.biblegateway.com/passage/?search=Galatians%2B3%3A15&version=ESV Codification, A. S. (2022). 842-10-25-1 . FASB Accounting Standards Codification®. https://asc.fasb.org/1943274/2147479948/842-10-25-2 Colombo, S., & Pignataro, A. (2022, April 5). Information accuracy and collusion . Wiley Online Library. https://onlinelibrary.wiley.com/doi/full/10.1111/jems.12477 Schroeder, R. G., Schroeder, R. G., Clark, M., & Cathey, J. M. (2009). Accounting theory and analysis: Text and cases . John Wiley & Sons.

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