Step 1: Identify the Problem
- a.Problem identification
Is it necessary for Midwest Realty to say that the future commitments involving lease will lead to losses?
- b.Analysis of problem
Midwest Realty stated that the least commitments were synonymous with operating leases. This also implies that the agreement could not be cancelled because it was standard. The leases were to make the monthly payments for a period of 10 years with an option of renewing for 5 years. Consequently, the lease agreements bound Midwest Reality regarding the lease of all offices.
- c.Redefined problem statement
Are there possibilities of identifying a current contingent loss in relation to commitments that bind the future rental?
Step 2: Evidence Collection
- a.Before reviewing the authorities, it is necessary to list the key search terms related to leasing. To search the website, some of the required key words include rental expense, contingent loss, losses, lease, and contingency, among others.
- b.Identification and reviewing literature and other sources
Step 3: Evaluation of Results and Identification of Alternatives
The following facts are evident in the documents after a close evaluation.
- It is possible for Midwest to forward funds as the payment of the vacant offices.
- There is the possibility of Midwest incurring losses due to lack of revenue generation from the remaining 6 offices that are still vacant.
- There exists contingency of the loss in relation to whether Midwest is in the position of subletting the vacant offices. It is intuitive to state that the occurrence of the loss is plausible and its estimation is known.
Contingency occurs in different scenarios involving accountability of losses and profits. Similarly, there are different types of losses that an established business can incur. In this case, the above facts prove that the loss incurred is contingent.
Step 4: Conclusion Development
The essence is to determine the exact amount of loss incurred on the rental commitment on the vacant offices. The loss is significant in this case because it carries a significant financial value. For instance, the loss should be recorded in the financial statements for the purpose of documentation.
Communication of the Results
Addressed to Calvin Brian, Controller
From XYZ, CPAs
With regards to your vivid requests, several reached a conclusion that we wish to communicate to you. It was possible to draft different matters and their impacts on Midwest Realty. The most important issue that needs urgent attention is the concern about the ease of determining a loss on the rental commitments on then vacant offices. The other concern is about the loss contingency that is more likely to surface. A loss contingency should only be charged on income under two occurrences. The first occurrence is the proof that there is a loss. The second occurrence is the scenario where the exact amount of loss can be determined reasonably. The two occurrences are the main proofs of imposing accruing charges on the loss contingency. Currently, Midwest Realty is ready to pay the lease amount on the vacant offices. Additionally, the company is yet to generate any revenues due to the effects of the incurred cost. It is our pleasure to declare that the offices in question can be subleased. It is intuitive to affirm that the total loss accrued by the vacant offices will be a minimum estimate of the actual loss incurred.
Check below the PDF sample.