Needs Space has entered into a lease agreementwith WeHaveIt to rent space for its corporate offices. The lease isclassified as an operating lease in accordance with ASC 840, Leases (FASB statement No. 13, Accounting for Leases).
The lease entered into between NeedsSpace and WeHaveIt has a10-year lease term (as defined by the Glossary in ASC 840 (paragraph 5(f) of Statement 13)), and there is no option to renewnor is ability to negotiate for renewal provided in the leaseagreement.
In addition, the lease agreement contains certain provisions thatmay require NeedsSpace to undertake certain activities and incurcertain costs at the end of the lease term. Such provisions include the following:
1. "Lessor may require the lessee to perform general repairs andmaintenance on the leased premises."
2. "Lessor may require the lessee to remove all leaseholdimprovements such that the premise is reinstated to originalcondition."
Within the leased premises, NeedsSpace has placed into servicevarious leasehold improvements (e.g., temporary walls, HVAC,carpeting) that have economic useful lives of 10 years.
Required:
1. How should NeedsSpace account for the two obligations noted as provisions in the lease agreement?
2. A written report of 8-10 pages.