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Now Leasing IncNow Leasing Inc, a worldwide airfreight service company based in US, hasentered into a lease agreement with First Lessor Co., to lease three cargo airplanesfor a 20-year non-cancelable lease. The lease is classified as a capital lease inaccordance with ASC 840, Leases. Annual lease payments shall be $3 million peryear, payable at the beginning of each year. The lease agreement is signed onDecember 1, 2012 and Now Leasingâs right to use the aircrafts begins on January1, 2013.Various provisions and other facts from the lease are listed below:1. First Lessor requires Now Leasing to pay $50,000 at the beginning of each yearfor other expenses (e.g., insurance, taxes, maintenance) related to the leasedaircrafts.2. Now Leasing pays Smith & Perry Inc., its external legal counsel, $1 million inconnection with negotiating the lease agreement. Now Leasing is also requiredto pay $2 million of legal fees incurred by First Lessor Co.3. The lease agreement stipulates that for each calendar year of the term of thelease after 2013, Now Leasing will pay minimum lease in an amount equal to$3 million increased (but not decreased) by the same percentage as the increasein the Consumer Price Index (CPI) from January 1 of the prior year until January1 of each respective year. The most recent annual increase in CPI as of theinception of the lease was 2%.Required:For each provision presented, evaluate whether the costs or potential costsassociated with the provision should be included in âminimum lease payments,âas defined in ASC 840, Leases.
