Lessee, Inc. (Lessee) is entering into a contract with Landlord, Inc.

(Landlord) to
rend Landlords newly constructed office building located at 555 Corporate Place,
Stamford, CT. The fair value of the leased building is approximately $5 million at
lease inception. The lease term is 20 years, and the estimated life of the building is
40 years. Lessee will occupy all 10 floors of the building. At the end of the lease
term, Lessee agrees to either renew the lease (at twice the current lease payment
price, which is assumed to exceed the fair value of the typical lease rental costs), or
Lessee agrees to purchase the building at fair value.
Monthly, Lessee will be required to pay $10,000 to occupy the building, plus a
monthly supplemental rental cost based on Lessees sales (1% of sales). From
experience Lessee estimates that 1% of its sales should approximate another
$15,000 per month. For simplicity, please ignore discounting for purposes of this
example.

Prepare a technical memorandum, citing the appropriate authoritative and nonauthoritative literature to address this transaction, and answering the following
questions:

Should the lease arrangement be classified as a capital or operating lease?

How would Lessee record this lease at the inception of the lease?
o Would this change under the proposed new leasing standard?
* Use ASC references