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Accounting for leases

Dr. Right-of-use asset $4,825

Cr. Lease liability $3,725

Cr. Cash $1,100

See Example 4-11 for an illustration of the subsequent measurement and recognition for this fact
pattern.

EXAMPLE 4-3

Finance lease recognition – real estate lease with a purchase option (lessee)

Lessee Corp enters into a property (land and building) lease with Lessor Corp on January 1, 20X9. The
following table summarizes information about the lease and the leased asset.

Lease term 10 years
Renewal option Five 5-year renewal options

If exercised, the annual lease payments are reset to then
current market rents

Economic life 40 years

Fair value of the leased property $5,000,000

Purchase option Lessee Corp has an option to purchase the property at the
end of the lease term for $3,000,000. Lessee Corp is
reasonably certain to exercise this option.

Annual lease payments The first annual lease payment is $500,000, with increases of
3% per year thereafter (see schedule of lease payments
below).

Payment date Annually on January 1 (first payment made at lease
commencement)

Incentive Lessor Corp gives Lessee Corp a $200,000 incentive for
entering into the lease (payable at the beginning of year 2),
which is to be used for normal tenant improvements.

Lessee Corp’s incremental 9.04%
borrowing rate
The rate that Lessor Corp charges Lessee Corp in the lease is
not readily determinable by Lessee Corp.

4-8