Question

If a lease is modified to extend the lease for an additional year select one:

a. and the lease payments for the extension are at current market prices, the contract for the lease extension is considered to be a separate lease.
b. and the lease payments for the extension are below current market prices, the original lease plus the new lease extension is considered to be a combined new lease.
c. and the lease payments for the extension are above current market prices, the contract for the lease extension is considered to be a separate lease.
d. both a and b
e. both a and c f. all of the above

Answer 1

If lease extension payments are at current market prices, the extension is considered a separate lease. When extension payments are below market value, the lease extension combined with the original is viewed as a new lease.

Step-by-step explanation:

If a lease is modified to extend the lease for an additional year, the treatment of the lease modification depends on the terms of the extension payment relative to the current market prices. When the lease payments for the extension are at current market prices, it is considered a separate lease. However, if the lease payments for the extension are significantly below current market prices, it is generally considered that the original lease and the new lease extension form a combined new lease.

The correct option for the question asked would be '(a) and the lease payments for the extension are at current market prices, the contract for the lease extension is considered to be a separate lease.' This assumes that the lease extension follows the normal standalone pricing without any adjustments for being a loyal tenant or other considerations that might be present in below-market rental agreements.