Lucas Case Essay

890 Words4 Pages
Case: Lucas Co. Lucas Co. entered into a lease agreement with Lessor Co. The lease is for equipment. It has been classified as a capital lease according to ASC 840, Leases. It is a 5-year lease term and there is no option to renew. Lucas is a manufacturing company that has had strong financial growth in the past few years, including a positive cash flow. It is in compliance with all its debt covenants. The lease agreement is signed on December 15, 2004 and Lucas Co can start using the equipment on January 1, 2005. They have the following three transactions that need to be analyzed under ASC 840, Accounting for Leases, to determine whether costs or potential costs associated with the provision should be included in minimum lease payments: 1. “Lessor requires the lessee to perform general repairs and maintenance on the leased premises.” 2. Lucas pays Mills and Buck LLP, its external legal counsel, $1M in connection with negotiating the lease agreement. Lucas is also required to pay $2 million of legal fees incurred by Lessor Co. 3. The stated default provisions in the lease include a provision that requires a penalty payment if Lucas’ bank declares a default under its primary credit arrangement. Lucas will be in default under the credit arrangement if there is a “material adverse change” in its financial condition. “Material adverse change” is not defined in the loan documents. The Company believes the likelihood of default is remote. The bank has no relationships with Lessor Co. In this particular capital lease, the lessor requires Lucas Co to pay for general repair and maintenance. According to ASC 840-10-25-5, “For a lessee, minimum lease payments comprise the payments that the lessee is obligated to make or can be required to make in connection with the leased property, excluding both of the following: a. Contingent rentals b. Any guarantee by the lessee

More about Lucas Case Essay

Open Document