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Accounting for leases

PV of annual lease payments, less lease incentive $3,237,510

PV of purchase option at end of lease term 1,262,490

Total lease liability $4,500,000

The right-of-use asset is equal to the lease liability plus the $500,000 rent paid on the lease
commencement date ($5,000,000).

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

Dr. Right-of-use asset $5,000,000

Cr. Lease liability $4,500,000

Cr. Cash $500,000

See Example 4-12 for an illustration of the subsequent measurement and recognition for this fact
pattern.

EXAMPLE 4-4

Lessee operating lease recognition – automobile lease

Lessee Corp leases an automobile from Lessor Corp on January 1, 20X9. The following table
summarizes information about the lease and the leased asset.

Lease term 3 years, no renewal option

Economic life of the automobile 6 years

Purchase option Lessee Corp has the option to purchase the automobile at fair
market value upon expiration of the lease.

Monthly lease payments $500 (first payment made at lease commencement)

Payment date Beginning of the month

Lessee Corp’s incremental 6%
borrowing rate
The rate Lessor Corp charges Lessee Corp in the lease is not
readily determinable by Lessee Corp.

4-10