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Accounting for leases
Other □ Title to the property does not automatically transfer to
Lessee Corp upon lease expiration
□ Lessee Corp does not guarantee the residual value of the
real estate asset
□ Lessee Corp pays for all maintenance, taxes, and
insurance on the property separate from the lease
□ There are no initial direct costs incurred by Lessee Corp
The schedule of lease payments (excluding the purchase option) is shown below.
Date Amount
Year 1 (paid at commencement) $500,000
Year 2 ($515,000 – $200,000 lease incentive) 315,000
Year 3 530,450
Year 4 546,364
Year 5 562,754
Year 6 579,637
Year 7 597,026
Year 8 614,937
Year 9 633,385
Year 10 652,387
Total $5,531,940
Lessee Corp determines that the lease is a finance lease because the fixed price purchase option is
reasonably certain to be exercised.
How would Lessee Corp measure and record this lease?
Analysis
Lessee Corp would first calculate the lease liability as the present value of the remaining unpaid
annual lease payments, less the lease incentive paid in year 2, plus the exercise price of the purchase
option using a discount rate of 9.04%.
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