Lease Memo

Stadium Center LLC (SC) has begun construction of a new entertainment center (the Center), which will provide a venue for a variety of entertainment events. Each event is estimated to last about four hours and patrons may enter approximately one hour early. SC projects that there will be approximately 100 events each year.

To provide an entertainment benefit for its employees, Goku Corp. (Goku) entered into a license agreement with SC on December 31, 2018. Under the terms of the license agreement, Goku will have the exclusive use of luxury suite #10 during all events and SC will provide Goku with twenty tickets for distribution to persons who may access such suite. Goku and the persons using the suite must abide by SCs terms of use, which generally require such persons not to cause harm to the suite nor be disruptive to the patrons of the rest of the Center. The term of the agreement is seven years. Payments are due annually on January 1 of each year, commencing on January 1, 2019. The first payment is $1,000,000, and payments escalate annually by 5%.

SC or the Centers staff may enter the suite during the events to provide assistance (e.g. food catering) or to ensure compliance with the terms of use. SC and/or the Centers staff are also responsible for maintaining the suite outside of the duration of the events. SC and the Center control access to the Center at all times. Other than for these terms, Goku has concluded that it otherwise effectively controls access to the suite during events as no other persons may access Gokus suite during events other than those to whom it has distributed tickets.

Goku has elected to combine lease and nonlease elements for all contracts that are or contain a lease. Goku has also elected not to apply ASC 842 to short-term leases.

Question 1: Determine if the license agreement has or contains a lease.

Question 2: Determine the term of the lease. (Hint: it is not simply seven years consider nonconsecutive lease terms).

Question 3: On the basis of question 2, determine how Goku should account for the lease.