Chapter 18, Problem 1SSC

Surfing the Standards Case 1: Lease Contracts

Consider each of the following scenarios and determine whether a lease contract exists for each scenario Support your conclusions with Topic 842 in the Codification and provide appropriate citations to the Codification

1. 1. Guitar World Company (GWC) sells musical instruments online It purchases acoustic guitars from several manufacturers in large volume and needs storage space for its distribution system To secure storage space, GWC enters into an agreement with Safe Storage Inc. to deliver 500 acoustic guitars per month to Safe Storage s primary location, which is the closest location to GWC. GWC can retrieve the guitars from the storage facility whenever it chooses. Safe Storage can move the guitars anywhere within the storage facility or move some of this inventory to a location in another city that it owns Safe Storage may want to move the inventory if it can obtain a higher rental rate from another customer for the primary location.
2. 2. Guitar World Company (GWC) sells musical instruments online. It purchases acoustic guitars from several manufacturers in large volume and needs storage space for its distribution system. To secure storage space, GWC enters into an agreement with Safe Storage Inc to deliver 500 acoustic guitars per month to Safe Storage's primary location, which is the closest location to GWC. GWC can retrieve the guitars from the storage facility whenever it chooses. Because GWC has a policy that all of its acoustic guitars must be kept in a facility that maintains humidity at 48%. the agreement between GWC and Safe Storage required the guitars to be stored at 48% humidity. To accommodate this requirement. Safe Storage modified a section in its primary location to maintain the humidity level at 48%.
3. 3. Johnston Power Company (JPC) recently entered into contract with Spin Move Wind Associates (SMWA) to utilize a particular power-generating facility. JPC is seeking to obtain a backup power source and believes that SMWA can provide the electricity when needed JPC will give SMWA advance notice as to when and how much additional power is needed up to SMWA facility's full capacity. Because SMWA agrees to provide electricity on demand, it runs the risk of having idle capacity during less-than-peak demand periods.
4. 4. Johnston Power Company (JPC) recently entered into contract with Spin Move Wind Associates (SMWA) to utilize a particular power-generating facility. JPC is seeking to obtain a backup power source and believes that SMWA can provide the electricity needed JPC agrees to buy all of it power from SPWA on a full-time basis.
5. 5. DataCo enters into an agreement with UtilityCo to use 40% of the capacity UtilityCo's fiber optic cable that runs from Chicago to an outlying suburb. This is the only cable that DataCo will use in this area. DataCo makes the decisions about the use of the fibers (in terms of determining what data and how much data will be transported). UtilityCo can substitute cables but only if the original cables become damaged.
6. 6. Farms, Inc enters into a 10-year agreement with Land Lovers Company to farm 1.000 acres of Land Lovers' land. The exact plot of land is specified in the contract Farms will likely use the land to grow corn but may rotate to soybean production every few years. Land Lovers included a clause in the contract that allows Land Lovers to specify operating procedures each year around the fertilization of the soil, depending upon annual soil tests.