Case 13-5 Variable Lease Payments

Part 1 Lease Payments Tied to An Index Bronx Company enters into an agreement with Brooklyn Company to lease office space for a term of 60 months. Lease payments during the first year of the lease are $20,000 per month. Each year, lease payments increase by an amount equivalent to the percentage increase in the Consumer Price Index (CPI). For example, if the CPI increases by 2%, lease payments during year 2 of the lease would increase 2% to $20,400 per month. If the CPI decreases or remains consistent, lease payments remain at the rate in effect during the previous year.

Required: What are the lease payments for purposes of classifying the lease?

Part 2 Real Estate Taxes Queens Company and Staten Company enter into a 10year lease of an office building for fixed annual lease payments of $90,000. According to the terms of the lease agreement, Queens Company is required to pay all real estate taxes associated with the building during the lease term. Real estate taxes are expected to be $25,000 for the first year of the lease.

Required: What are the lease payments for purposes of classifying the lease?

Part 3 Lease Payments Tied to Fair Market Value Manhattan Company enters into a fiveyear noncancelable office lease with Yonkers Company. The lease contains a fiveyear renewal option that Manhattan Company is reasonably certain to exercise. The lease payments are fixed at $200,000 annually for each of the first five years. The annual lease payments for the renewal option will be set at the beginning of the renewal period based upon the fair market rent at the beginning of the renewal period.

Required: What are the lease payments for purposes of classifying the lease?