APPLIED RESEARCH EXERCISES – ACCOUNTING ISSUES MEMO

Background: Flames Corporation is a private entity created and funded by alumni boosters of The University of Illinois at Chicago (UIC) Athletic Department. Flames Corporation has entered into contracts with College Aviation, Inc. relating to the use of a private airplane to transport the school’s athletic teams to collegiate sporting events. Flames Corporation supports UIC’s view that private transportation is important for the health and safety of athletes, coaches and other athletic personnel due to the recent coronavirus pandemic. College Aviation offers 3-year contracts for universities (or their boosters) to reserve a plane for use during the academic year. The first contract between Flames Corporation and College Aviation, Inc provides the right to use a specific aircraft for various dates throughout the academic year and allows Flames Corporation to place the UIC Flames logo on the aircraft for the duration of the contract. Flames Corporation provides the dates of travel and the arrival and departure locations at least one week in advance of each trip, which is not predetermined in the contract terms. Although College Aviation can make operational decisions about the flight plan and specific route, it is Flames Corporation who determines when the plane will fly. College Aviation provides the airplane, crew, and pilot for each flight (see separate contract info below). Flames Corp will pay College Aviation a fixed fee per month over the academic year for use of the airplane. In addition to the airplane contract, Flames Corporation has a separate contract with College Aviation for services relating to the flights including services provided by the pilot and crew, fuel, maintenance, and parking the airplane when not in use. These services are billed to Flames Corp. on a monthly basis based on usage. Required: You are asked to write an Accounting Issues Memo to address whether the contracts for 1) airplane transportation and 2) the crew and plane services are to be considered leases for Flames Corporation. You should consider each of the two contracts separately. You are NOT required to determine the type of lease (e.g. operating vs. finance lease), but rather whether either or both of the two transportation related contracts contains a lease. You should assume that the new lease rules under ASC 842 (required for years ending after December 15, 2018) are applicable to this setting. You should follow the standard accounting issues memo format (e-text Chapter 4 and Lecture Notes #14). It is highly recommended that you review the style and format of the Sample Accounting Issues Memo in the Chapter 4 Appendix as a guide for memo approach and structure. I also suggest that you use of the ‘guidance sandwich’ approach (see Chapter 4 and coursenotes) when presenting each use or cite of relevant Codification sections. 2 Your memo should be no more than 5 pages long, using 12-point Times New Roman font, one-inch margin on all sides, double spacing in the text and single spacing for any sections from the codification.

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