ACCT352 Research Case

Crimson believes that since Matador can terminate the revenue contract after one year (even
though Matador may need to ship products for longer than a year and has historically renewed
under other similarly structured contracts), it is uncertain whether Matador will renew the
revenue contract. Because of this uncertainty, Crimson believes that the renewal options related
to the lease are not reasonably certain at the commencement date of the lease.
As a result, Crimson concludes that the lease term for its lease contract with Buckeyes is also one
year.
Required:
1. Do you agree with Crimson’s conclusion that the lease term for the cargo vessel is one
year because the revenue contract is for one year?
2. What factors should Crimson consider in supporting its conclusion related to the lease
term?
Additional Facts
On December 1, 2019, Crimson entered into a shipping contract with Redhawks Manufacturing
Company (“Redhawks”) to ship Redhawks’ products between Shanghai and Los Angeles. The
contract with Redhawks commences on January 1, 2020, and on the basis of Crimson’s
evaluation of its enforceable rights and obligations in the contract with Redhawks, Crimson
concludes that term of the revenue contract with Redhawks is for a period of two years. Further,
Crimson concludes that (1) because of its contract with Matador and Redhawks, it would not be
operationally feasible to deploy the leased cargo vessel on other routes; (2) the cargo vessel will
have sufficient capacity to service both Matador and Redhawks; and (3) the leased asset is
needed for Crimson to perform under its revenue contract with Redhawks (because of economic
reasons that would not allow Crimson to use another vessel).
Required:
3. Should Crimson reassess the lease term of the cargo vessel? If so, why?
Analyze the above and prepare a 1-2 page report (font 12 of Times New Roman; short
answers with bullet points are encouraged) addressing the three questions.