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Accounting for leases




                        Other                            □  Title to the automobile remains with Lessor Corp upon
                                                             lease expiration
                                                         □  The fair value of the automobile is $30,000; Lessee Corp
                                                             does not guarantee the residual value of the automobile
                                                             at the end of the lease term

                                                         □  Lessee Corp pays for all maintenance of the automobile
                                                             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 an operating 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 remaining unpaid
                       monthly fixed lease payments discounted at Lessee Corp’s incremental borrowing rate of 6%; this
                       amount is $16,018.

                       The right-of-use asset is equal to the lease liability plus the $500 rent paid on the lease
                       commencement date ($16,518). Lessee Corp would record the following journal entry on the lease
                       commencement date.


                        Dr. Right-of-use asset                            $16,518

                        Cr. Cash                                                          $500

                        Cr. Lease liability                                             $16,018


                       See Example 4-13 for an illustration of the subsequent measurement and recognition for this fact
                       pattern.

                       EXAMPLE 4-5

                       Lessee operating lease recognition

                       Lessee Corp leases a copier 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 copier      5 years

                        Purchase option                  None







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