Dear
Accounting experts, please help!
Answers
From the limited info....
The biggest issue I saw (from your post) is the write off of the asset. Not sure of the timing (and what entries you made) but you need to put the asset back on the books. You can't lease out what you do not own. Unless the lease termination involved the asset being worthless (fire, etc) the asset should not have been written off. Also not sure what you mean by "take over" the lease as the previous lease was already terminated/non-existent. Company B has a NEW lease albeit with the terms of an old one (with no upfront fee?). YOU STILL OWN THE ASSET.
Thank you Emerson for your response and my apologizes for lack of information.
Each AC installed on customer's house transmits information on the usage. However that particular asset that was written off was not transmitting any data so after trying to get a hold of the customer for many months, the Company wrote off the asset assuming the asset was not working properly and is worthless.
About the Customer B, I shouldn't have said "take over". When Customer B moved into Customer A's house, B happened to see the AC installed on the house and reached out to the Company asking to sign a new contract with the same asset. (After an inspection, AC happen to be in a working condition)
What should the Company do? I agree on your point that you cannot lease an asset that you do not own.
Reverse the write off of the asset but not higher than current FMV. Recognize terminated lease income for the remaining balance of the $10k if you haven't already. Record income on the new lease as you would any other new lease.
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Thanks so much Scott for your response! Your feedback makes a total sense and I completely agree with you. Is there a fasb guideline to reference it? Your help is greatly appreciated!!
Technically, when the asset was "written off" it was really an impairment loss measured in accordance with the FASB guidance at ASC 360-10-35-17. In this case, when Customer A disappeared, the Company estimated that "the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset" would be zero.
ASC 360-10-35-20 states that, if an impairment loss is recognized, the adjusted carrying amount of a long-lived asset shall be its new cost basis. For a depreciable long-lived asset, the new cost basis shall be depreciated (amortized) over the remaining useful life of that asset. Restoration of a previously recognized impairment loss is prohibited.
So you cannot reverse the write off, as some others have suggested. The air conditioner should be in your asset listing with a zero value. Note that most companies have numerous fully-depreciated assets - it is not necessary for an asset to have net book value in order for it to be owned and used.
Do you have external auditors? Sounds like you may want them to weigh in on the opinion.
Thanks everyone who have contributed to this post! I will definitely discuss this with the external