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Accounting for leases

Annual lease payments $500, which includes Lessor Corp maintenance for the term
of the lease

Lessor Corp normally leases the same copier for $475 per
year and offers a maintenance contract for $75 per year.

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

Lessee Corp’s incremental 5.5%
borrowing rate
The rate Lessor Corp charges Lessee Corp in the lease is not
readily determinable by Lessee Corp.

Other □ Title to the copier remains with Lessor Corp upon lease
expiration
□ The fair value of the copier is $2,000; Lessee Corp does
not guarantee the residual value of the copier at the end
of the lease term

□ Lessee Corp pays $100 in legal fees related to the
negotiation of the lease, which are treated as initial direct
costs
□ Lessor Corp does not provide any incentives

Lessee Corp has not made an accounting policy election to not separate the lease and nonlease
components for this class of asset.

Lessee Corp determines that the lease is an operating lease. In addition, the allocated annual lease
payment is $432.

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 allocated lease payment amount of $432 discounted at Lessee Corp’s incremental borrowing
rate of 5.5%; this amount is $798.

The right-of-use asset is the sum of the lease liability, plus the $432 lease payment made on the lease
commencement date and the initial direct costs paid by Lessee Corp ($100); this amount is $1,330
($798 + $432+ $100).

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

Dr. Right-of-use asset $1,330

Cr. Lease liability $798
Cr. Cash $532

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