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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

4-11