University of Utah Accounting The Terminator Case Study Questions

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The Terminator Case Study

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The Terminator Case Study
Question Three Reassessment of Lease Term for cargo Vessel.
Yes, it should. The initial lease was conclusively attributed to cover one year despite
an expansive provision for renewal up to five additional years. This initial lease contract was
based on the availability of a single entity as the main provider for revenues to Trans Ocean.
With an additional client – Eastern Manufacturing Company, Trans Ocean will realize
additional revenues while operating on the same route as required by Asia. Furthermore, the
commencement of the two company’s contract periods is different and do not coincide.
Asia’s products need to be shipped from Shanghai to Los Angeles as from 1st July 2019.
While operating on the same route, Trans Ocean needs to ship products for Easter as from 1st
January 2019. This differences in commencement dates imply that in a case where Asia’s
contract expires, then the lease agreement with Heavy for the vessel also expires just when
Eastern’s products need to be shipped. This would significantly inconvenience Trans Ocean
and Eastern.
The lease contract term needs to be modified and possibly extended to cover for the
requisite period of shipping products for Eastern. Assuming is sure about Trans Ocean and
gets an additional seven years on their working relationship. This means that the contractual
agreement will surpass the threshold term initially agreed between Asia, Heavy and Trans
Ocean. To remedy this dilemma, Trans Ocean will need to renegotiate and possibly extend
the lease period with Heavy Vessel Manufacturing. The new lease term should be above the
standard one-year assumption to give room for the variance in commencement dates between
Asia and Easters shipments.
Trans Ocean is right when it makes assumptions and concludes that the lease term
for the cargo vessel equals the period for Asia Manufacturing’s shipping contract of one year.
This conclusion is supported by the regulations and facts provided about the leasing of the

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cargo vessel from Heavy Vessel Manufacturing and shipping of products f...

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