Midwest Realty, Inc. is a regional real estate firm. Andrea incorporated the firm 11 years ago. She is the founder, president, and the majority stockholder. Recently, Andrea decided to expand her successful local real estate firm into a regional operation. She established offices in major cities across the Midwest.

Midwest Realty, Inc. leased the office space. The standard lease agreement included a 10year, noncancelable term and a fiveyear option renewable at the discretion of the tenant. Two years ago, the residential home market was depressed in the Midwest due to the movement of factory jobs abroad, a shaky economy, and tight credit policies. So, Midwest decided to eliminate 10 offices located in depressed economic areas that she believed would not recover in the housing market during the next five years.

This year, Midwest Realty, Inc. closed the 10 offices. Midwest Realty, Inc., however, was bound by the lease agreements on all these offices. The company subleased four of the 10 offices but continued to make lease payments on the six remaining vacated ones. Midwest Realty properly classified the lease commitments as operating leases.

The controller for the company, Calvin Brain, expressed concern to Midwest about the proper accounting for the lease commitments on the six remaining offices available for subleasing. Brain believes they must recognize that the future lease commitments are a loss for the current period. However, the executives of Midwest disagree and believe that the rental payments are period costs to recognize as an expense in the year paid.

Midwest is confident that the company can sublease the vacant offices within the next year and avoid booking a loss and corresponding liability in this accounting period. Midwest has, however, given Brain the job of researching this problem and making recommendations supported by current authoritative accounting pronouncements. Help Brain develop his recommendations.

Analyze, consider alternatives, and write a research memo.