Preliminary: Sale-Leaseback of Bell Plaza, 1600 7th Ave, Seattle WA by hx6s897

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									        Preliminary: Sale-Leaseback of Bell Plaza, 1600 7th Ave, Seattle WA

This exhibit, divided into two sections, provides the book value of the property as of
April 30, 2008 (Section 1) and an estimate of the accounting treatment for the sale and
leaseback transaction (Section 2). Section 2 is further subdivided into four parts showing
the accounting steps needed to record the transaction and the affects upon financial
statements. Please note that certain amounts shown are subject to change, as discussed
below, until the close date of the agreement. While Section 1 is straightforward, Section
2 is discussed further here.

2) Estimated Journal Entry:


General:
o Record the cash received.
o Retire the land and record a gain on the sale of the land.
o Retire the building and record proceeds as salvage. No gain on the sale is
   recorded but the sale is recognized as a ratebase reduction.
o Record proceeds attributable to the lease as a ratebase reduction and amortize
   over the lease term.

This section of the exhibit portrays the accounting for a sale and leaseback transaction
following FCC Part 32 rules. Additionally, the relevant GAAP accounting standard
prescribed by the Financial Accounting Standards Board (FASB) in this instance is
provided in Statement of Financial Accounting Standards No. 28 (SFAS 28) –
Accounting for Sales with Leasebacks (May 1979).

The accounting treatment under Part 32 differs for the sale of land versus the sale of a
building. When land, a non-depreciable asset, is sold the asset is retired and a gain or
loss is recognized into income in account 7100 – Other Operating Income and Expense
[Part 32.2000(d)(4)]. However, when depreciable telecommunications plant without
traffic is sold, that is, when the building is sold the asset is retired and salvage is
recorded. Under FCC mass asset accounting individual units of plant (i.e a building) are
not separately depreciated but rather an entire class of assets (i.e. large buildings) is
depreciated. Thus, a retirement under mass asset accounting removes the full book value
from plant in service and an equal amount is recorded to reduce accumulated
depreciation. No gain or loss is recognized but rather the net proceeds received on the
building are recorded as salvage in account 3100 – Accumulated Depreciation [Part
32.2000(d)(5) and Part 32.3100(c)] and recognized as a reduction to ratebase.

SFAS 28, in accounting for an operating lease in a sale and leaseback transaction,
requires that a portion of the gain equal to the present value of the lease payments made
over the term of the lease be deferred and amortized. That is, Qwest will make annual
lease payments totaling approximately                            lease term. The present
value of these annual payments or approximately            represents the deferred amounts
attributable to the operating lease which will be amortized on a straight line basis over the

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                            Confidential per WAC 480-07-160
lease term. The deferred gain is recorded in account 4300 – Other Long-term Liabilities
and Deferred Credits with a charge to accumulated depreciation and is recognized as a
reduction to ratebase. Over the lease term the deferred amount of the lease is recognized
ratably as a credit to rent expense resulting in an increase to net income and an equal
increase to rate base in each year of the          lease.


Accounting Activity:

Record Cash Receipts:
The net proceeds received in cash are recorded. The net proceeds equal the purchase
price less closing costs. The amount of closing costs is subject to change until finalized
at the close of the transaction.

Retire Land:
When the land is sold the asset is retired from plant in service account 2111 and a gain or
loss is ultimately recognized into income in account 7100 – Other Operating Income and
Expense [Part 32.2000(d)(4)]. Since land is a non-depreciable asset the retirement of the
book value of the land from account 2111 is charged to account 7100. In a subsequent
step below the net proceeds on the land are credited to account 7100. The combination of
these two steps in this transaction has two affects: (a) a decrease in ratebase resulting
from the retirement of the land; and (b) an increase to income as the result of the gain
recorded in account 7100 equal to the excess of proceeds on the land over the book value
of the land. The book value of the land shown here is as of April 30, 2008 while the final
journal entry will reflect the actual amount at the date of close.

Retire Building:
Under Part 32 principles of mass asset accounting the sale of plant without traffic, in this
case the building, is treated as a retirement and proceeds attributable to the building sale
are recorded as salvage. No gain or loss is recognized. When the building is sold the
book value of the asset is retired from plant in service account 2121 and an equal amount
is charged to account 3121 Accumulated Depreciation. The salvage on the building is
recorded in the next step. The book value of the building shown here is as of April 30,
2008 while the final journal entry will reflect the actual amount at the date of close.

Record Proceeds:
In a sale-leaseback transaction portions of the proceeds are attributable to (a) the land, (b)
the building and (c) the lease; until the close date of the transaction the proceeds
attributable to each is subject to change.

(a) As discussed previously the proceeds on the land             are recorded in account
7100 and a gain           on the sale of the land is recognized.

(b) Under SFAS 28 – Accounting for Sales with Leasebacks the portion of the gain
attributable to the operating lease are to be amortized over the lease term. The amount of
these proceeds equals the Present Value of the minimum lease payments made over the

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                            Confidential per WAC 480-07-160
term of the lease. The minimum lease payments include basic rent payments but exclude
other executory or operating costs Qwest will pay the lessor over the lease term such as
insurance, maintenance and taxes. The rent payments over the term of the lease are
estimated to be approximately           and have a present value of approximately xx xx
using Qwest’s borrowing rate of xxxxx. The rent payments, present value and discount
rate are subject to change until the lease agreement is finalized. Additionally, a provision
of the purchase agreement (item 6.1) allows for a short term lease the terms of which
have not yet been finalized and so may have an affect upon the present value.

Under FCC Part 32 and Part 65.830 the present value of the lease payments is recorded to
account 4300 as a ratebase reduction xxxxxx. Over the course of the lease these deferred
credits will be amortized to income resulting in annual increases to income and offsetting
increases to ratebase.

(c) The proceeds on the building xxxxxxxx are recorded as salvage in account 3121
Accumulated Depreciation per Part 32 rules thus recognizing the sale of the building as a
decrease to ratebase.




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                            Confidential per WAC 480-07-160

								
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