Page 130 - pwc-lease-accounting-guide_Neat

Accounting for leases

EXAMPLE 4-2

Finance lease initial recognition – non-specialized digital imaging equipment lease (lessee)

Lessee Corp enters into a lease of non-specialized digital imaging equipment with Lessor Corp on
January 1, 20X9. The following table summarizes information about the lease and the leased assets.

Lease term 5 years, no renewal option

Economic life of the leased 6 years
equipment

Purchase option None

Annual lease payments $1,100

Payment date Annually on January 1 (first payment made at lease
commencement)
Lessee Corp’s incremental 7%
borrowing rate
The rate Lessor Corp charges Lessee Corp in the lease is not
readily determinable by Lessee Corp.

Other □ Title to the asset remains with Lessor Corp upon lease
expiration

□ The fair value of the equipment is $5,000; Lessee Corp
does not guarantee the residual value of the equipment at
the end of the lease term

□ Lessee Corp pays for all maintenance of the equipment
separate from the lease

□ There are no initial direct costs incurred by Lessee Corp

□ Lessor Corp does not provide any incentives

Lessee Corp determines that the lease is a finance lease.

How would Lessee Corp measure and record this lease?

Analysis

Lessee Corp would first calculate the lease liability as the present value of the four remaining unpaid
annual fixed lease payments of $1,100 discounted at Lessee Corp’s incremental borrowing rate of 7%;
this amount is $3,725.

The right-of-use asset is equal to the lease liability plus the $1,100 rent paid on the lease
commencement date.

Lessee Corp would record the following journal entry on the lease commencement date.

4-7