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Big Bear Power

In: Business and Management

Submitted By Hanging10
Words 877
Pages 4
Memorandum

To: Big Wig, CFO, Big Bear Power
From: James Albert
Date: March 24th, 2016
Subject: The Bear Minimum

Statement of Relevant Facts:
Big Bear Power and Goliath Company entered into a contract in which Big Bear leased a combustion turbine. * The contract was signed on December 15th, 2004, but did not begin until January 1st, 2005. * The contract lasts for 10 years and is non-cancelable * Big Bear pays $500,000 in legal counsel fees, and are required to pay $1,000,000 in legal fees incurred by Goliath Co. * If Big Bear’s bank declares default, Big Bear will have to pay a penalty. * Big Bear is in default if “material adverse change” is proven (not defined in the contract) * The chance of default is remote. * The bank has no relationship with Goliath Co. * The annual lease payments are $1,000,000 and payable over 12 months at the beginning of each month * Big Bear will pay the minimum payment plus the percentage increase in the Consumer Price Index (CPI) (most recent increase is 4%)

Identification of Issues and Alternatives:
The issue with this case is determining if the stated provisions will be included in the minimum lease payments.

Provision one has two issues. The first dilemma is defining the appropriate action of the $500,000 Big Bear Power assumed in legal counseling fees, which will be considered expenditures of the lessee. The next problem is the proper allocation of the fees to be paid on behalf of Goliath Co. These fees can be developed through the use of ASC 840-10-25-6(e), which relates special-purpose entity lease transactions.

Provision two speaks about the possibility of Big Bear Power having to pay penalties. For the penalties not to be included in the minimum lease payments all the conditions of ASC 840-10-25-14 must be true.

Finally, in the last provision, the conflict is the…...

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