A liability for continuing costs is recognized and measured at fair value when the right under the contract is no longer used. For an operating lease, the initial fair value of the liability is based on the remaining lease rentals adjusted for any recognized prepayments or deferrals and decreased by an estimate of sublease rentals reasonably obtainable (regardless of any intent to sublease). However, remaining lease rentals are not reduced below zero. Using expected present value to estimate the fair value of the rental payments minus the reasonably obtainable sublease payments, Lessee should recognize a liability for continuing lease costs in the amount of the present value of an annuity due (payments are at the beginning of each period) for 5 years (12 – 6 – 1) discounted at 6%. Consequently, Lessee should recognize a liability of $133,950 [($150,000 annual lease rental – $120,000 annual sublease rental reasonably obtainable) × 4.465 PV factor for an annuity due of 5 periods at 6%].
@Frosty–I think it helps even if you aren't as far along. I know it's helping me 2 weeks from test date because I haven't reviewed some of these things in weeks because I've been working on the later material. I appreciate all the review this is giving me. I wouldn't mind some more of the later material as well, but I'll be reviewing that stuff on my own anyways.
OK–so the expected sublet revenue is deducted to calculate the liability but only up to the point of the lease obligation at present value. If you expect to sublet for more than the obligation you wouldn't get an asset, you would just have $0 liability. Right?
@CPAMommy, Well just reviewing the questions today has helped alot… and I was actually suprised at how many of them I got right and understood, even if i didnt RTMFQ every time.
Question: 2 Each of the following would be considered a Level 2 observable input that could be used to determine an asset or liability's fair value except
A. Quoted prices for identical assets and liabilities in markets that are not active.
B. Quoted prices for similar assets and liabilities in markets that are active.
C. Interest rates that are observable at commonly quoted intervals.
D. Internally generated cash flow projections for a related asset or liability.
Sorry–I'm totally working this out online instead of in my head. I think Market prices are level 1, but that would be for identical assets in an active market, not similar assets. Interest Rates are part of level 2, and internal forecasts and projections are level 3.
Internally generated cash flow projections are not observable and would be considered a Level 3 input. Level 3 inputs are unobservable inputs that are used in the absence of observable inputs. They should be based on the best available information in the circumstances.
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