CHAPTER 10 LESSEE ACCOUNTING

Lease – right to use the asset at a particular time in exchange for consideration

RIGHT TO CONTROL THE USE OF ASSET – the customer has the right to control if the customer
1. Obtain substantially all of the economic benefits from the use of the asset – exclusive use of the asset

2. Direct the use of identified asset

2 Types of Lease Contract

1. Finance Lease – the lessee shall recognize a right of use asset (Asset account) and lease liability
(Liability account)
- All lessee shall account the lease under this method

Journal Entry: Upon payment of lease

Right of use of asset xx
Lease Liability xx

2. Operating Lease – the lesee may account the lease using this method if:
a. It is a short term lease – less than 1 year
b. Low value lease – the standard does not provide the value or amount (matter of judgment)

Journal Entry: Upon payment of lease

Rent Expense xx
Cash xx

FINANCE LEASE
Right of use of asset – separate line item in the balance sheet as asset

Measurement
Initial: At Cost it includes
1. Present Value of lease payments
2. Lease bonus less lease incentives
3. Initial direct cost incurred by lessee
4. Estimated cost of dismantling, removing and removing the underlying asset for which the lessee has a
present obligation

Notes:
- Lease improvement is not included. It will be accounted as PPE (property plant and equipment)
- Any security deposit made by the lessee which is refundable upon expiration of the lease term
shall be accounted as Receivable.
- Executory cost is considered as expense
- If there is a residual guarantee, there is no purchase option because the lessee will return the
property to the lessor

Subsequent: Cost less Accumulated Depreciation less Accumulated Impairment

Depreciation of Right of Use of Asset

a. if there is a transfer of ownership or it is reasonably certain to exercise the purchase option.
- Useful life of asset

b. If not transfer of asset

- shorter between the useful life or lease term
Lease Liability –
Measurement
Initial: Present Value of Lease Payments
- Discounted using the Implicit Rate.
- Alternative: Incremental Borrowing Rate

It includes the following:

1. Fixed lease payments
2. Variable lease payments
3. Exercise price of a purchase option - if option is reasonably certain to be exercise
4. Amount expected to be payable by the lessee under a residual value guarantee
5. Termination penalties

Formulas
PV of lease payments x
Add: PV of purchase option x
PV of residual value guarantee x
Total Lease Liability x
Initial Direct Cost x
Lease Incentive (x)
Payment to lessor to obtain long term
lease x
PV of restoration x
Cost of Right of Use of Asset x

Unguaranteed Residual Value is not included

Cost of Right of Use of Asset x

Less: Salvage Value x
Depreciable Amount x

If Option is not Exercise

The lessee must recognized loss on finance lease

Right of Use of Asset x

Less: Accumulated Depreciation x
Carrying Amount x
Less: Lease Liability Balance x
Loss on Finance Lease x

CHAPTER 11 OTHER ISSUES

EXTENSION OF LEASE TERM

PV of remaining rentals (old) {PV of annual rental x PV of ord. annuity) x (use the new implicit rate)
PV of rental for extended terms x
PV of lease payments x
Less: Carrying Amount of old (Table) x
Increase in Lease Liability x

Annual Rental (new) x

x PV of ordinary annuity for extended period x
Total x
x PV of 1 for the remaining old period x
PV of rental for extended terms x

Cost of right of use of asset (old) x

Less: Accumulated Depreciation (old) x
Carrying amount (old) x
Add: Increase in Liability x
Adjusted Carrying Amount of Asset x
Divide by: Useful life or lease term x
Depreciation Expense x

Problem 10-1
PV of lease payments (800K x 4.17) 3,336,000
Add: PV of purchase option -
PV of residual value guarantee -
Total Lease Liability 3,336,000
Initial Direct Cost 100,000
Lease Incentive -
Payment to lessor to obtain long term lease -
PV of restoration -
Cost of Right of Use of Asset 3,436,000

Cost of Right of Use of Asset 3,436,000

Less: Salvage Value -
Depreciable Amount 3,436,000

2020
Jan. 1
Right of use of Asset 3,336,000
Lease Liability 3,336,000

Right of use of Asset 100,000

Cash 100,000
Lease Liability 800,000
Cash 800,000

Dec. 31
Depreciation expense 687,200
Accumulated Dep 687,200

Interest expense 253,600

Interest payable 253,600

Taxes 40,000
Cash 40,000

Payment Interest expense Principal PV

Jan.1,2020 3,336,000
Jan.1,2020 800,000 - 800,000 2,536,000
Jan.1,2021 800,000 253,600 546,400 1,989,600
Jan.1,2022 800,000 198,960 601,040 1,388,560

2021
Dec. 31
Depreciation expense 687,200
Accumulated Dep 687,200

Interest expense 198,960

Interest payable 198,960
Taxes 40,000
Cash 40,000

2025
Accumulated Depreciation 3,436,000
Right of use of asset 3,436,000

Problem 10-2
PV of lease payments (1M x 3.79) 3,790,000
Add: PV of purchase option -
PV of residual value guarantee -
Total Lease Liability 3,790,000
Initial Direct Cost 150,000
Lease Incentive (50,000)
Payment to lessor to obtain long term lease -
PV of restoration -
Cost of Right of Use of Asset 3,890,000

Cost of Right of Use of Asset 3,890,000

Less: Salvage Value -
Depreciable Amount 3,890,000
2020
Right of use of Asset 3,790,000
 Lease Liability 3,790,000

Right of use of Asset 150,000

Cash 150,000

Cash 50,000
Right of Use of asset 50,000

Dec. 31
Depreciation expense 389,000
Accumulated Dep 389,000
(3,890,000 /10)

Interest expense 379,000

Lease liability 621,000
Cash 1,000,000

Taxes 75,000
Insurance 125,000
Cash 200,000

Payment Interest expense Principal PV

Jan.1,2020 3,790,000
Dec.31,2020 1,000,000 379,000 621,000 3,169,000
Dec.31,2021 1,000,000 316,900 683,100 2,485,900

10-11 A
PV of lease payments (400K x 5.95) 2,380,000
Add: PV of purchase option (500,000 x 0.27) 135,000
PV of residual value guarantee -
Total Lease Liability 2,515,000
Initial Direct Cost -
Lease Incentive -
Payment to lessor to obtain long term lease -
PV of restoration -
Cost of Right of Use of Asset 2,515,000

10-12 B
PV of lease payments (800K x 5.11) 4,088,000
Add: PV of purchase option -
PV of residual value guarantee -
Total Lease Liability 4,088,000
Initial Direct Cost -
Lease Incentive -
Payment to lessor to obtain long term lease -
PV of restoration -
Cost of Right of Use of Asset 4,088,000

10-13 B/B/C
 PV of lease payments (1M x 6.145) 6,145,000
Add: PV of purchase option -
PV of residual value guarantee -
Total Lease Liability 6,145,000
Initial Direct Cost 200,000
Lease Incentive -
Payment to lessor to obtain long term lease -
PV of restoration -
Cost of Right of Use of Asset 6,345,000
Less: Salvage Value -
Depreciable Amount 6,345,000
Divide by useful life or lease term (w/c ever is shorter) 10
Depreciation expense 634,500

Payment Interest expense Principal PV

Jan.1,2020 6,145,000
Dec.31,2020 1,000,000 614,500 385,500 5,759,500
Dec.31,2021 1,000,000 575,950 424,050 5,335,450
14. D
15. B
16.
17. A
18. B/A/A/A
19. B/C/B/C
20. B
21. B
22. B
23. A
24. D
25. A
26. C
27. D/B/C
Payment Interest expense Principal PV
Dec.31,2020 2,700,000
Dec.31,2020 400,000 - 400,000 2,300,000
Dec.31,2021 400,000 230,000 170,000 2,130,000
Dec.31,2022 400,000 213,000 187,000 1,943,000

28. A
Right of Use of Asset 4,000,000
Less: Accumulated Depreciation (2,450,000)
Carrying Amount 1,550,000
Cash Payment of equipment 1,600,000
Total 3,150,000
Less: Lease Liability (1,300,000)
Cost of Actual Purchase 1,850,000

29. A
 Right of Use of Asset 4,800,000
Less: Accumulated Depreciation (4.8M - 300K = 4.5M /8 x 6 yrs) (3,375,000)
Carrying Amount 1,425,000
Less: Lease Liability Balance (100,000)
Loss on Finance Lease 1,325,000

30. B/B/C/C
PV of lease payments (1M x 4.31) 4,310,000
Add: PV of purchase option -
PV of residual value guarantee -
Total Lease Liability 4,310,000
Initial Direct Cost 350,000
Lease Incentive (150,000)
Payment to lessor to obtain long term lease 100,000
PV of restoration 200,000
Cost of Right of Use of Asset 4,810,000
Less: Salvage Value -
Depreciable Amount 4,810,000
Divide by useful life or lease term (w/c ever is shorter) 5
Depreciation expense 962,000

Payment Interest expense Principal PV

Jan.1,2020 4,310,000
Jan.1,2020 1,000,000 - 1,000,000 3,310,000
Jan.1,2021 1,000,000 264,800 735,200 2,574,800
Jan.1,2022 1,000,000 257,480 742,520 1,832,280