Question

Warren Marina owns a large marina that contains numerous boat slips of various sizes. Warren contracts with boat owners to provide slips to house the customers’ boats. Lucky Fisherman Fleet contracted with Warren to provide space for four of its fishing boats. The contract specifies that Lucky Fisherman’s boats will be kept in identified slips in the marina. The agreement includes the requirement that Warren provide 45-foot slips per boat for a three-year period, space that Lucky Fisherman can modify with fenders, docklines, and equipment needed to conduct its fishing business. Warren cannot switch locations of the boats or modify the slips without Lucky Fisherman's consent. Warren paid $16,000 on March 1, 2021, for the first year's accommodations. The market rate of interest is 5%.

Is it a lease? (explain it with the two key criteria "ASC 842": identified asset and the lessee must have the right to control the use of the identified asset)

Answer 1

Does the contract explicitly or implicitly identify an asset to be used to fulfill the contract? No.

Two key criteria must be met for an arrangement to constitute a lease:

1.

There must be an identified asset, and

2.

The lessee must have the right to control the use of the identified asset.

The asset is identified because the contractexplicitly specifies 45-foot slips for four boats which will be identified per boat, although the actual location of the slips is not identified. Although Warren Marina has agreed to provide a specific level of capacity within its marina, it has the unilateral right to relocate Lucky Fisherman Fleet’s boats for its own benefit and can do so without significant cost to accommodate more customers and thus provide economic benefit to Warren Marina. This is a substantive substitution right. Therefore, this agreement constitutes a service contract, not a lease.

March 1, 2021

Prepaid expense ……………… 16,000

  Cash………………………. 16,000